A BUSINESS ASSET SALE is the acquisition or sale of an ongoing business enterprise through the purchase and sale of all, or substantially all, of the assets used by a seller in the operation of the business. The assets of any business will typically consist of a variety of tangible and intangible property rights including real property, tangible personal property (such as inventory and trade fixtures), and intangible personal property (such as contract rights, accounts receivable, and patent and trademark rights). While the consideration in many sale of assets of transactions is cash paid by the buyer to the seller, it is also possible to structure a sale of assets to permit the buyer to deliver a promissory note or debt or equity securities as consideration. In those situations, the seller will need to evaluate the creditworthiness of the buyer.
A sale of asset is distinguished from the acquisition of a business through a corporate merger, reorganization, or other acquisition of an ownership interest in an existing business entity where there is no transfer of ownership in the assets owned by the acquired entity. Although structured as a single transaction, an asset sale is essentially a number of separate transactions involving different types of property that must each be transferred in accordance with the particular laws applicable to each separate category of property.
Bulk Sales Law may apply to certain transactions. The purpose of the Bulk Sales Law is to discourage potential fraud against a seller’s creditors by requiring the buyer to record and publish notice of a pending bulk sale and by providing a procedure for entitled creditors to make claims on the proceeds of the sale. Bulk Sales Law generally applies if: (1) the seller’s principal business is the sale of inventory from stock, including those who manufacture what they sell, or is that of a restaurant owner; and (2) if the seller is located in California.
BUY-SELL AGREEMENTS are typically used in small, closely -held corporations. Corporate stock is considered to be personal property that the owner may sell or transfer absent controlling provisions imposed by law or contained in the corporation’s charter documents. In addition, the owners often wish to provide mechanisms by which they might be able to liquidate their interest in the business, and will want “buy-sell” provision, which provide for the sale of a shareholder’s stock to the corporation or the other shareholders upon the occurrence of certain events, (for example, on the death or termination of employment of the shareholder), or agreed terms and conditions.
Thus, a buy-sell agreement may be desirable for the following reasons: (1) to retain the power to choose their future associates and coworkers; (2) to prevent the business from falling under the control of competitors; (3) to ensure that all the owners are actively involved in the business and avoid conflicts that may arise between active and passive investors; and (4) to ensure balance of control over the business.
Thus, it is wise for one to seek professional advice to determine whether an asset sale or stock purchase transaction is best under the circumstances. There are significant tax consequences to be considered before jumping into these type transactions.