I’ve been part of deals that initially began as business asset sales, only to transform into sales of equity securities. Likewise, I’ve worked on equity sales that have been changed to sales of business assets.
Asset sales come with unique benefits and often reduce the risk that existing liabilities can follow the buyer as compared to a business sale. Think of tax issues, potential labor claims, or unknown customer claims, for example, which can continue to follow a business entity regardless of a change of ownership.
However, asset sales can come across barriers, particularly when certain supplier or customer contracts limit assignment to the new acquiring entity, or when maintaining business licensing is vital for ongoing operations.
Consider how these factors impact businesses like restaurant chains, hotel groups, vehicle repair shops, or schools, all of which are heavily reliant on business licensing that is tied to a specific location (thereby limiting the ability to swiftly swap asset ownership without disruption), in contrast with businesses like an online marketing firm, an e-commerce business, a software developer, certain types of factories, or even a brick and mortar retail chain, all of which can usually transition more easily into operations under a new business entity without significant business disruption.
Of course, these considerations are also nuanced: key contracts (including leases) often contain provisions indicating that a change of control constitutes an unauthorized assignment of contract, or business licenses in some regulated industries might be intricately tied to the existing ultimate beneficial ownership structure.
These are just some of the considerations in determining whether an asset sale or a business sale is beneficial.
In a business sale, a buyer can still be protected from past liabilities. A thorough due diligence of the target business is fundamental. Additionally, indemnity provisions, detailed and specific reps and warranties, insurance, escrows and personal guarantees all come into play in protecting an equity purchaser from potential liabilities from the past.
From a seller perspective, both in an asset or business sale, mechanisms such as pledges, mortgages, security agreements and UCC filings can be used to guarantee the performance by a buyer of any payments that are deferred under the purchase and sale arrangement.
I find that business brokers often choose business asset purchase structures by default. This is, in part, to protect their finders’ commission in light of securities regulations that generally provide that transaction-based compensation in a securities transaction is limited to registered broker-dealers. However, these hurdles can also be overcome with the proper structure, such as by relying on the M&A Exemption, which is now codified as of this year.