What is an Asset Sale and How Does it Work?

An asset sale involves selling a business’ asset/s to another party, the purchaser. This includes tangible assets such as equipment and inventory, and intangible assets such as your business’ goodwill, its intellectual property (IP) and customer lists. This article explains what an asset sale is, how it works in practice and the steps to take to sell businesses assets.

Asset Sale vs. Business Sale

An asset sale differs from a business sale agreement. A business sale agreement generally involves the sale of a whole business, whereas an asset sale contract involves the transfer of a specific asset/s of a business. For example, selling a group of cars from a rental car company may be via an asset sale contract. The sale of the rental car business itself would involve a business sale agreement.

How Does an Asset Sale Work?

In an asset sale, you retain the legal entity of the business and only sell the business’ assets. For example, say you run a rental car company owned by Harry Smith Pty Ltd. You decide that you need to sell 50% of your fleet to upgrade your vehicles and want to sell those vehicles in one transaction to one buyer.

When selling assets, an interested purchaser can buy those specific assets under an asset sale contract. They may ask for particular warranties regarding the vehicles and, therefore, may require a separate document from standard vehicle transfer forms. Additionally, they want to ensure the vehicles are unencumbered (free from any debts or claims so they can be easily sold). However, as the seller, you still retain the entity Harry Smith Pty Ltd and are still liable for any associated debts. The purchaser only owns the assets you sold them.

Asset Sale Considerations

An asset sale can be used to sell any assets, whether they are tangible or intangible. Franchise agreements, trade marks and domain names can be transferred via asset sale contracts.

It is important to also consider the tax implications when selling some or all of your business assets. The effects vary depending on your circumstances and obtaining tax advice is crucial.

Asset Sale Agreement

Once a seller or vendor finds a purchaser to buy their assets, they need to formalise the sale in writing. Generally, the parties will negotiate the key commercial terms of the agreement and include these in a document called a heads of agreement. It is essential to be aware of whether the heads of agreement is binding or not. The language in the agreement and intention of the parties typically indicate whether the document is binding or not. Key commercial terms in an asset sale include:

• the vendor and purchaser’s details;
• the purchase price deposit and apportionment of sale;
• payment terms;
• timeline of the sale;
• restraint of trade; and
• what is included, such as:
  • plant and equipment;
  • fixtures and fittings;
  • domain names; and
  • trade marks.

After agreeing on the key commercial terms of the sale, it is important to have a lawyer draft the terms into a binding contract. You should understand the contract, and ensure it includes all aspects of the sale, as it is final. Aside from the key commercial terms, you should:

• ensure the agreement outlines all of the assets for purchase;
• understand that the purchaser may undertake due diligence;
• include warranties and indemnities for the assets. For example, warranties may include the assets being in good working order and being free from any encumbrances; and
• include any special conditions agreed to, such as transferring any licences necessary for the business to operate.

Key Takeaways

An asset sale refers to a business deciding to sell its assets, whether they are tangible or intangible, as opposed to selling the entire company under a business sale agreement. Selling assets is extremely common for businesses and it is important that there is an asset agreement in place to reduce misunderstandings and future disputes.

If you have any questions or need assistance with an asset sale, get in touch with LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.