What is Sold When the Business is Sold in an Asset Purchase Transaction

When a business is sold in an asset purchase transaction, the business itself is not a thing that is sold. What is sold are the assets that make up the business. So what assets are sold by the seller and bought by the buyer of the business in an asset purchase transaction? Trusted California business purchase and sale lawyer, Richard Burt shares his thoughts below.

Of course, the assets sold in a business purchase vary by business, but here are the categories that most commonly show up when a business bought and sold.

Equipment. This category includes such things as machinery, office furniture, computers, test equipment, trade fixtures, and motor vehicles. In the sale of manufacturer, the principal “hard” assets might be machinery used in the manufacture of products while the principal “hard” assets in the sale of a restaurant might be tables and chairs, dishes, utensils, glassware, cookware, and kitchen appliances. In the sale of a service business, the “hard assets” might be office furniture and computers. Sometimes business brokers and accountants refer to equipment being sold as furniture, fixtures, and equipment (FF&E).

Inventory. If a business for sale has inventory, the inventory will typically be sold. Inventory includes raw materials, work in process, and finished goods. The inventory will obviously vary by business. For example, inventory of a restaurant for sale will consist of food and beverages on hand. For a number of purposes, supplies held for use or consumption in the operation of the business are treated as inventory.

Accounts receivable. This asset represents money owing but not yet paid by customers for goods sold or services rendered by the business. Sometimes the buyer buys the accounts receivable and sometimes the seller keeps them.

Leaseholds. The rights of the business as a tenant to occupy the real property used in the business. Usually, the seller of a business assigns the lease to the buyer so the buyer can continue the business in place. Typically, the landlord’s consent is required to assign the lease to a purchaser. Of course, some businesses own the real property that they occupy, but often that is not sold to the purchaser of a business; instead it is frequently leased to the purchaser.

Equipment leases. A business might lease equipment instead of purchasing it to avoid the cash outlay that a purchase entails. The rights of the business as a lessee of  equipment can be assigned so the buyer of a business can take possession and use the leased equipment used in the business, though typically the lessor’s consent is required.

Contracts. Depending on the business, some of the most valuable assets of a business that is up for sale can be contracts. These can be contracts that the business has with customers or suppliers or they can be franchise or other agreements that give the business certain rights.

Governmental authorizations. Various businesses require various governmental authorizations, permits, licenses, and registrations. Most are not transferable, but some are. For example, a business for sale that has a liquor license has a valuable asset that can be sold to a buyer.

Software. Most businesses for sale have software of some kind, which the purchaser will want to acquire. This can be software developed by the business as well as off-the-shelf software, such as operating systems, word processing, spreadsheet, and accounting programs. Software-as-a-service is usually not sold as it typically is not transferable and requires the buyer to enter into its own agreement with the software provider.

Intellectual property. Most businesses for sale have some kind of intellectual property (sometimes referred to by the shorthand expression “IP”). This includes copyright, patents, trademarks, service marks, and logos. Trade secrets, including customer lists, are another form of intellectual property.

Intangible assets. A buyer of a business may be interested in the seller’s intangible assets that are typically not listed on a financial statement. These include URLs, IP addresses, domain names, instant message accounts and social media accounts as well as telephone numbers and email addresses for the business.

Goodwill. This is an intangible asset, but it’s usually in a class by itself. Goodwill is the value that accrues to a business over and above the value of its other assets. For example, if the assets of the business being sold have a value of $1 million but the buyer pays the seller $1.5 million for the business, the buyer will have paid $500,000 for goodwill. Typically, goodwill is not shown as an asset on a balance sheet unless it has been purchased. So if there is goodwill, the seller may not show goodwill on its balance sheet, but the buyer will show goodwill as an asset on its balance sheet.

When buying a business, it is helpful for a buyer to have the assistance of lawyer experienced in buying and selling a business. Richard Burt is such a lawyer.