What Is an Asset Sale and When Should You Use This Deal Structure?

An asset sale is a transaction in which a buyer purchases specific assets of a business rather than buying the entire company. 

In these scenarios, the seller keeps the legal entity. The buyer chooses what is included in an asset sale, whether it’s equipment, customer contracts, or inventory. They can skip what they don’t want, like certain debts or legal issues. It also gives both sides options when it comes to taxes and liability.

This partnership structure is more common in lower middle market deals, especially when buyers want flexibility over what they’re acquiring. Many buyers prefer business asset sales. It works well for buyers who want to reduce risk, and for sellers who aren’t ready for a full liquidation. Sometimes business owners want to keep part of the company while planning exit strategy or for strategic tax advantages.

Asset Sale vs. Stock Sale vs. Merger

Business transactions can happen in three ways: buying specific assets, buying the entire company, or combining two companies into one.

●     Asset Sale: A buyer purchases individual assets. The seller keeps the legal entity.

●     Stock Sale: A buyer purchases ownership shares and takes over the entire company, including liabilities.

●     Merger: Two businesses combine into one. All assets and liabilities transfer under one new or existing entity.

Each deal type fits different situations.

●     Asset sales work well when there are big liabilities or when the buyer wants specific assets only.

●     Stock sales are simpler if the buyer wants everything as-is, including contracts, licenses, and staff.

●     Mergers often happen when two companies want to fully combine operations.

What's Typically Included in Asset Sales

An asset purchase can include both physical and non-physical assets. What’s included or excluded from the equity sale is detailed in the purchase agreement.

Tangible assets:

●     Furniture, Fixtures, and Equipment (FF&E)

●     Inventory

●     Real estate

Intangible assets:

●     Customer lists

●     Goodwill

●     Intellectual property (like patents or trademarks)

●     Contracts

Typically excluded:

●     Cash

●     Debt

●     Seller’s personal assets

●     Some liabilities

Assumed liabilities depend on the agreement. The buyer might take on certain obligations, like contracts or warranties, but most of the time, old debts stay with the seller.

Purchase price allocation influences tax rates. The company’s assets are assigned a value that affects tax treatment for both buyer and seller.

Key Benefits and Drawbacks

Each type of deal has distinct advantages and disadvantages that buyers and sellers must carefully weigh when structuring the sale.

Buyer Advantages

●     Less risk: Avoid unwanted liabilities.

●     Tax benefits: Step-up in tax basis for depreciation and amortization.

●     Flexibility: Choose which assets to acquire.

Buyer Disadvantages

●     May need third-party consent for contracts or leases.

●     Could lose customers or employees who were loyal to the old entity.

Seller Advantages

●     Keeps control of the company entity and can retain business assets.

●     Can leave behind unwanted obligations.

●     Can manage tax liabilities.

Seller Disadvantages

●     Complex transfer process for many individual assets.

●     If a C-Corporation, may face double taxation (once at the company level and again when profits are distributed).

Tax Implications and Considerations

For Sellers: Different assets are taxed in different ways. Some gains are treated as ordinary income, while others may be hit with capital gain rates. Equipment that was depreciated may trigger ordinary income tax designations.

For Buyers: The ability to assign a new tax basis to acquired assets is a benefit. This step-up means more value to write off through depreciation or amortization, lowering taxable income.

Purchase price allocation has to be agreed upon. The IRS reviews these allocations closely because they affect how each side reports income or gains. Buyers often want a higher valuation assigned to depreciable assets, while sellers may prefer allocations that get capital gains tax treatment.

Legal and Operational Considerations

There’s more paperwork involved in an asset sale than a stock deal or merger. The buyer and seller need to transfer each asset one by one.

Things to consider:

●     Customer contracts and supplier agreements may need to be reassigned.

●     Real estate and commercial lease agreements must be renegotiated or transferred.

●     Employee issues: Buyer must decide whether to hire employees directly. Benefits may not carry over.

●     Regulatory approvals: Some industries need permits or licenses that must be transferred or re-applied for.

When to Choose Asset Sales Over Other Structures

This transaction structure makes sense when:

●     The business has significant liabilities the buyer wants to avoid.

●     The buyer only wants specific assets, like IP or real estate.

●     Tax benefits from a step-up in basis are important to the buyer.

Stock sales work better when:

●     The company has a clean balance sheet and a good reputation.

●     Ongoing relationships with customers or employees are key.

●     The seller wants a faster, less complex deal.

Assembling a team of experts, including a CPA and tax attorney, can help both sides decide on the best deal structure. Every deal is different, and small changes in taxes or contracts can shift what’s most beneficial.