An asset sale is the term used when a vendor sells a particular asset to a buyer, such as a piece of equipment or a service contract. This article sets out the features of an asset sale, key terms in an asset sale agreement and the differences between an asset sale and other business sales.
Features of an Asset Sale
An asset sale can include the sale of any number of items including:
- intellectual property (IP) (e.g. a trade mark or patent); or
- service contracts (e.g. a cleaning contract or property management rent roll).
An asset sale usually occurs when the seller wants to sell only part of the business. This is often because the seller intends to continue operating the rest of the business after the sale. For example, a mortgage broker can choose to sell a particular commission list to a buyer and continue to operate his brokerage business after the sale.
The purchase of a particular asset does not involve the buyer taking over the seller’s whole business. Therefore there are tax consequences that both parties will need to consider.
For example, the “going concern” exemption for GST is unlikely to apply to the sale of a particular asset. Since the buyer is not purchasing everything needed to continue the operation of the seller’s business, the buyer will probably need to pay GST on their purchase of the asset.
Key Terms in an Asset Sale Agreement
There are several clauses commonly found in an asset sale agreement. The following table sets out and explains these key clauses.
|Warranties||A buyer will want to make sure that the seller is giving warranties specific to the asset. For example, warranties about equipment imply they should be in good working order and comply with relevant safety standards.|
|Exclusions||As you are only selling a particular asset, any relevant exclusions should be specified. For example, you may sell a client list but not the platform used to manage the list. This should be identified as an exclusion and acknowledged by the buyer.|
|Restraint||If the seller intends to continue operating its business after selling a particular asset, they need to make sure there are no restraints of trade included in the agreement to prevent them from doing so.|
|Taxes||The agreement should set out which party is responsible for any GST payable on the sale, as well as any other associated sale taxes, penalties or fees.|
These clauses are often also in a sale of business agreement. However, in an asset sale agreement, these terms usually focus on the specific asset. They do not include provisions that would relate to the sale of a whole business (such as the transfer of employees).
Differences Between an Asset Sale, Business Sale and Share Sale
People easily confuse the term ‘asset sale’ with ‘business sale’ and ‘share sale’. But each has distinct characteristics.
- Asset sale: This involves the sale of a particular asset, not all assets the seller uses to operate a business.
- Business sale: This involves the sale of all assets that the seller uses to operate their business (such as plant and equipment, IP, and goodwill). A business sale is a type of asset sale.
- Share sale: This involves the sale of shares in the seller’s company to the buyer. By buying all shares in a company, the buyer effectively owns the company’s assets. This includes any businesses owned and operated by that company.
When selling or buying a business, it is important to think about which sale type listed above is relevant and most suitable for your circumstances. An experienced sale of business lawyer can advise you on the advantages and disadvantages of each and which would be ideal for you.
An asset sale is a term which refers to the sale of a particular asset to a buyer. It includes sales of IP or inventory and is distinct from a share sale. If you are looking for assistance with asset sales or purchases, call LegalVision’s sale of business lawyers on 1300 544 755 or fill out the form on this page.
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