Buying and Selling Assets

MBA Mondays are back after a week hiatus. We are several posts into a series on Merger and Acquisitions. In our last post, we talked about the key characteristics of mergers and acquisitions. And we touched on the two kinds of purchases, the asset purchase and the company purchase. Today I’d like to talk about the asset purchase.

As I said in the prior post, a buyer can either purchase the entire company or the buyer can purchase select assets and assume select liabilities. This kind of transaction is known as an asset sale.

Asset sales can happen as a partial exit or a complete exit. In the partial exit, a company transfers certain assets and certain liabilities to another company in exchange for some consideration, and then continues operating as a going concern. In the complete exit, the company transfers all of the assets and liabilities that the acquirer is interested in and then winds down the company and settles all remaining liabilities and then liquidates.

In the partial exit, the asset sale is a desirable transaction. It is the way that many spinoffs are done. Many companies will build or buy themselves into a diverse set of operating businesses and they ultimately realize that the business has gotten too complex to operate or too complicated to explain to investors. They can simplify their business by spinning off, selling, and otherwise exiting some, but not all, of their businesses.

In the complete exit, the asset sale is often an undesirable transaction. If there is not going to be an ongoing business left after the sale transaction, it is most often best to get the purchaser to take all the assets and all the liabilities via a company purchase. 

The asset sale allows the purchaser to “cherry pick” the desirable assets and take on the liabilities they are comfortable with and leave the seller with undesirable assets and remaining liabilities. The seller then has to unwind what is left and liquidate the company. The seller may have to use some or all of the consideration that was given (cash or stock) for the desirable assets to settle the remaining liabilities. The seller cannot liquidate the business and take out the consideration before settling with the creditors. If the liabilities are larger than the consideration obtained, a bankruptcy or some other settlement procedure with creditors may be necessary.

The asset sale may also be undesirable for tax reasons. In a company purchase, the acquirer purchases the stock from each of the stockholders and takes control of the entire business. The stockholders get a capital gain, either short term or long term depending on the length of time they held the stock. In an asset sale, the consideration goes into the seller’s company and is used to settle liabilities and wind down and liquidate. Any remaining cash after all that will be distributed out in a liquidating distribution. There may be taxes to be paid at the company level on the sale transaction which will further eat into the proceeds which can be paid out. And there is the possibility of taxation of the liquidating distribution depending on what kind of business entity the seller was operating. That is called “double taxation” and you want to avoid that in an acquisition transaction.

There may be times when an exit is best done via an asset sale. I can imagine a set of circumstances where it might actually be desirable for a seller to do that. But those circumstances are not very common and it is generally true that if you are looking to exit a business, you want to do it via a company purchase transaction, not an asset sale transaction.

If you are the acquirer however, asset purchases can be very desirable. They allow you to avoid liabilities you don’t want to take on and cherry pick the assets you want. 

In my experience, asset sale transactions are generally done in “fire sale” situations and company sale transactions are generally done in all other M&A transactions. At least that is how I’ve seen it done in venture backed technology companies.

Next week we will talk more about the company sale transaction.


#MBA Mondays

Comments (Archived):

  1. Drew Meyers

    I think all these “MBA Mondays” should be turned into a book at some point — between your knowledge and that of the commenters in the community, it would probably be the most comprehensive alternative to the material taught in a MBA program

    1. Donna Brewington White

      MBA Mondays: The Bookby Fred Wilson and the AVC CommunityI agree that this material would be an excellent book (probably in a series of volumes), and even more unique and valuable if some of the comments were included. If, this could somehow, catch some of the flavor of this community, this would be rich!.I don’t know what impresses me more, the amount of ground he’s covered or the breadth of the audience he can reach with one post — actually pretty amazing — not overly simplified for those with more advanced knowledge/experience and yet very understandable for anyone with any interest in business (although some like me may have to re-read a few sections) — which is partly what would make it work as a book.Screenplay next.

      1. fredwilson

        i suspect this series reaches way more people in its current form thanit ever would as a book

        1. Donna Brewington White

          It’s not necessarily “either…or.”

        2. Mark Essel

          The challenge is on us to find evidence if this assumption is true, and whether it’s desirable to have a bigger audience diving into this material. Can you imagine groups of students with very weak or no net access debating the nuances of best business/startup practices?I can.

    2. awaldstein

      Agreed. But books as we define them today are static. Blogs by definition are dynamic at their best (like Fred’s).Would make a useful book potentially. But I’d like to see someone come up with a new format. Maybe Disqus could put their heads around a dynamic representation engine with better search and display to let the user experience the creation of thought and ideas that is as effective in a time-lapsed presentation as in real-time.

      1. fredwilson

        now, we are talkingmaybe a wiki of some sort would workthe idea that this should go to physical form seems totally wrong to mein digital form it can and always will be available for free to everyoneboth the highly educated well off and the disadvantaged hungry kid whowill do anything to make itit’s the latter that inspires me the most

        1. awaldstein

          Blogs when they work are alive and dynamic at least for some period of time. I was thinking less book and more dynamic capsule of sorts.Wiki possibly but something that when viewed over time carries forth the exchange and at its best let’s the follow on conversations be dynamic (and memorialized) as well.

        2. Donna Brewington White

          Yeah, maybe, I’m thinking “book” from a limited perspective — although “book” these days can be digital. What I’m really after is some sort of way to be able to reference the material and have it function as a “body of knowledge” with indexing, etc. rather than as individual posts.Like right now, if I click on “MBA Mondays” I get a page showing that there are 46 posts in this category and I have to keep clicking to get to the older posts and I don’t know what I will find until I get there — plus the sequencing is backwards. It would be great to have more maneuverability and ability to cross-reference. Right now, if I want to find an older post, I google it — but I can only look for it if I already know it’s there.No matter the format, there are ways to make it accessible to that disadvantaged hungry kid (love that!) — and online.Fred — what you are sharing is unique and incredibly valuable on so many levels. My thought is to make the material as accessible and as usable as possible…in whatever formats (plural) that best accomplish this.

      2. ShanaC

        I honestly think we just lack better tools for engagement in normal books, especially as we move away from print. If you are not reading Plato dynamically, you need to be taught how to read again, both from a concentration POV and from a engaging materials POVI also think this isn’t Disqus’s purview in the short to medium term. I really want to see a mild overlayer to books, one that isn’t distracting to reading the book but allows me to add material and look up information about the book. Sort of like how gemara commentary is printed…

        1. awaldstein

          But wrapping up a blog is not like reading a book in digital form with tools to share your thoughts on it. I think these are two different things.Capturing this blog needs to capture the back and forth (“comments are content”) and let someone readying this at a later time, engage and share.

          1. Donna Brewington White

            When I think “book” (in whatever form), I’m not thinking that it would fully capture the back and forth which is, of course, the true beauty of AVC (!), but that it would include some of the insights gained from the comments.I’m thinking of “book” more as something to reference. Not as a replacement for the beauty of what goes on here — like this completely OT comment stream.

          2. awaldstein

            Interesting.I’ve done some work (and blogging) on the idea of building community around time-shifted media for connected TV. The issues and challenges around that have some intersections with building community around legacy blog content although with blogs it’s more complex as the original content is dynamic as well.

          3. Donna Brewington White


          4. awaldstein

            Flash communities, time-shifted media and connected TVs

          5. Donna Brewington White

            Thanks, Arnold. Now have it bookmarked. Have a feeling I’m going to need to read slowly, but look forward to it. You are another one who helps make stuff more accessible.

          6. awaldstein

            Thank you.

          7. ShanaC

            True. But how would you do that with a book? I keep wondering what the next generation of classics are going to be.

          8. awaldstein

            I think this is to-be-invented.If this is a passion of yours, maybe you are the one to create this new paradigm Shana.

          9. ShanaC

            I have something I am trying to work on. I chose it for its simplicity, for those who will hopefully use it it will clear up a number of issues. I probably should be talking to more marketing and advertising people about what I want to do, come to think of it.I will keep that one on the backburner. Just because I do believe in reading a good book every now and then.

          10. Donna Brewington White

            Love how you think, Shana.

    3. fredwilson

      why does it need to be a book?it’s right here for everyone to access

      1. Rick Bullotta

        doesn’t need to be a book, but an e-book compendium for offline reading would be nice to have (inclusive of the comments and responses, which are often as interesting as the original commentary). The main reasons for offline access? I call them “the Kohler factor” and “the 35K feet factor”- bathrooms and airplanes. Print media’s future depends on continued quality time spent on the couch or crapper…

        1. JLM

          Hahaha, the Kohler Factor!I wonder if I have learned more in classrooms or bathrooms?Merry Christmas, you wit!

  2. kagilandam

    Fred that is a too early Monday MBA … r u somewhere in Europe?I completely agree with partial asset selling … if the bread winner is only sold as an asset it is better to sell the whole company OR hold IP rights.I did that with my last company. I closed the operation 3-years ago and then someone was interested in the code … i sold it on code sharing last year (I can do whatever i want to do in future with code and so he can). I am not doing anything with the code right now … but there is always an opportunity for anything you develop. It cost nothing but a DVD!!!

    1. fredwilson

      i’m in the middle east for the next 10 days

  3. Fernando Gutierrez

    Don’t asset sales need some kind of authorization from creditors in certain cases? Specially when it happens as a complete exit, I can see a lot of situations in which this could be done to damage them.

    1. fredwilson

      yes, if they have a lien on the assets

    2. JLM

      No creditor with a perfected lien is going to allow you to sell anything unless they are getting paid off at the closing table.

  4. lushfun

    Assuming a start-up has no creditors and only investors, how would it sell/spin off assets? would it have to have a proxy for investors to agree. I am thinking about Twitter being spun off from Odeo, since Odeo got bought.

    1. fredwilson

      investors will likely have some sort of control over asset sales

    2. JLM

      A well run company’s Board of Directors provides an Annual Resolution providing the President, CEO with the authority to “run” the company for the year.Public companies are required to have this “annual resolution”. If you ever get involved in any litigation, this will be the first thing the other side will ask for in discovery.The typical annual resolution grants the President, CEO the authority to run the day to day affairs of the company in accordance with an annual budget. It spells out certain critical things — can the CEO fire the CFO without checking w/ the Board?All capital transactions — purchases, sales, refinancings — should be beyond the scope of that annual resolution and should require approval by the Board of Directors subject to a Decision Memorandum and a Corporate Resolution.Funny thing — I just got done finalizing two such documents for a couple of deals that close before year end.Well run companies are well run and it requires a bit of annual planning and it is useful if the Board has a bit of discipline and seasoning to know what to do to make a company run well.

  5. Abhijeet Mukherjee

    Hey Fred, on another note, I wanted to request if you could create a separate feed for the MBA Mondays category and let users subscribe to it. Right now, if I try to subscribe to… , it directs me to the main feed which I am already subscribed to. But, I want the MBA Mondays post to appear in a priority folder in Google Reader so that I never forget to read them. And that’s only possible when there’s a separate feed for those articles.

    1. fredwilson

      i think i need to hack typepad to do thati’ll check for suregood suggestion

      1. Fernando Gutierrez

        Meanwhile there goes a quick and dirty solution I just did with Yahoo Pipes:…It filters posts whose category contains “mba”. The feed now only has one item because it only starts to fetch in the last ten items in the AVC feed, but it should populate as soon as there are new posts in that category (I haven’t used Pipes lately, so I’m not fully sure). If someone knows how to overcome this please say so and I’ll update.

        1. Abhijeet Mukherjee

          Awesome, Fernando! That should work for the time being. Thanks!

          1. Fernando Gutierrez

            Glad it helped! BTW, I just checked and the feed will populate as soon as new posts appear in that category.

        2. Mark Essel

          Nice hack Fernando.

        3. fredwilson

          I love yahoo pipesThanks for doing this Fernando

        4. ShanaC

          Thank you!

      2. Abhijeet Mukherjee

        well, I am not sure if you use feedburner or not, but in that if you just burn a separate feed for the url…, it should be able to create one in an instant. I did that for my site which is a wordpress blog. The same technique might work for typepad too, though i am not sure how typepad handles feeds.

      3. Mark Essel

        You could repost to a new feed if needed. I think categories used to have their own feed in blog systems. I’ll checkNevermind, I see Abhijeet mentioned the feedburner example below.

  6. Eric Hellman

    My start-up went through an asset sale that was structured that way for reasons you may not have encountered. My company was (and still is) an S-Corporation, so the favorable capital gains treatment flowed right through to the owners; the acquiring company was a 501(c)3 non-profit, which couldn’t take ownership of an S-corp without awkwardness. We sold all the non-cash assets of the company, including the name.

    1. fredwilson

      excellenti am sure that different corporate structures will allow differentsituations to work best

  7. Mark Essel

    I can see the purification advantage of an asset sale. If a company is too complicated to explain to investors, it’s likely too complicated to optimize without internal conflicts. An asset sale enables healthy businesses to fork down divergence paths. Market advantages of scale (huge conglomerates) is industrial age thinking. The network economy allows for ubiquitous scale while enabling concentrated focus on a narrow market slice by outsourcing the plumbing of the business.An example:Niche professional blog communities splitting out of Tumblr, Posterous and WordPress to come together under a new roof. I dig the way Seth Godin has enabled Squidoo lens sales and gifting. You can horizontally split content assets anytime and the market determines the value.

    1. ShanaC

      Unlikely – I would say WordPress spinning out IntenseDebate would be a better example, which would sell to Disqus…

      1. Mark Essel

        That would be interesting.I still would like content I write to be native on all the platforms. I could repost it within Tumblr/Posterous/ but I think search engines (Goog) penalizes multiple posts.

  8. Tim Dierks

    Asset sales can also occur in other situations where some of the assets are complicated for the acquirer to take on; for example, I was recently involved in an exit where one part of the business was a consulting business with customers who were in direct competition with the acquirer. So we sold the large majority of the business as an asset sale and left the consulting business to be wrapped up separately (not as a going concern, but with enough assets to close out the existing contracts).

  9. JLM

    Having bought more than a few companies, I can only recommend the asset purchase for an acquirer.I am totally unsympathetic to the seller’s implications and any such implications are fully represented and compensated for in the purchase price.Acquirers need to be careful about what they ARE and what they ARE NOT acquiring. You want to acquire all the assets which are creating the cash flow or are core to the business and NONE of the liabilities.You would be surprised as to the number of assets which are not obvious on the first blush — trade names, logoes, customer lists, files, opportunities currently presented to the company, etc. etc. etc.These assets should be listed by name on an Exhibit to the maximum extent possible and then a global description should be written which comprehensively describes the class of assets.When dealing with intellectual property, confidential information, proprietary information it is also important to ensure that the seller owns it and that current and former employees are not able to walk out of the building with these same assets.It is also important to take physical possession of the assets and to ensure there are not copies lying around for the rest of the world to misappropriate.Last and perhaps most important consideration — always have a 12 month holdback of some considerable amount of money or recite a right of “set off” if you are acquiring the assets in part with a promissory note.Having a bit of the other guys money is fundamental discipline. I suggest 15% of the total purchase price.Remember, you only get what you negotiate, not what you deserve or thought you were getting. It is not because folks are bad but after a sale, you cannot find the seller. Believe me on this issue.

    1. JLM

      Just one additional detail, make sure that the seller indemnifies you and holds you harmless in any and all attempts by liability holders to collect from you. Remember anybody with $25 for the filing fee can sue you to collect.If the seller is going to liquidate thereafter, make damn sure that you have an indemnification that represents reality. An indemnification from an entity which is gone is not going to provide any assurance.Every liability in the world will plead that the conveyance of the assets to you was “fraudulent” made in order to remove some element of common law collateral from their grasp.Stuff happens.

      1. fredwilson

        Great advice JLM

    2. LIAD

      you da man.

    3. Donna Brewington White

      “Remember, you only get what you negotiate, not what you deserve or thought you were getting.”Just reblogged this on Tumblr.

    4. Dave W Baldwin

      Good advice! Here is a link regarding ‘builders’ you will like.

      1. JLM

        What a thought provoking and damn good read. Probably one of the most insightful articles I have ever read. The concept of the Builder does not dispute the concepts of leadership, it refines and evolves them to a higher plane. Thanks very much. Merry Christmas!

        1. Dave W Baldwin

          You too. As I stated in the succinct AGI/BCI, Ms. Warrior of Cisco has it right regarding the entering of the true age of collaboration.

  10. ShanaC

    Although you said this is a bad idea long term- Relationship of asset sales to SPV, especially when it comes to taxes?

  11. Ethan Stone

    Fred is right that stock sales are more common than asset sales in the acquisition of VC-backed companies, but the distinction between them is more complicated.First, tax: There are often tax advantages to the sellers in a stock sale, but there are also tax advantages to the buyer from an asset purchase. If the seller is a “c” corporation (which most VC portfolio companies are), the seller’s disadvantages usually outweigh the buyer’s advantages. Outside of that context, however, sellers are more often organized as “pass through” entities (“s”corporations or LLCs) or are subsidiaries of other corporations. In those situations, there isn’t a double tax on an asset sale and the tax costs of an asset purchase to the seller tend to be much closer to the tax benefits to the buyer. Depending on the tax situations or the buyer and seller, the tax effects can also vary widely. For example, I’m closing a deal on Wednesday that is structured as a stock sale for regulatory purposes (we need to keep in place some valuable government licenses), but the parties are electing to treat it as an asset purchase for tax purposes. The seller has more tax losses than it can use, so it won’t pay any tax. Nonetheless, the buyer is paying for the seller’s agreement to make the tax election.If the tax effects are close enough to be dealt with in the purchase price, the acquisition structure is usually determined by non-tax considerations. Those usually favor asset purchases. The reason is that an asset purchase allows the buyer to avoid unknown (or undisclosed) liabilities. Unknown liabilities are the nightmares of business buyers: undiscovered environmental liabilities, employment lawsuits, tax claims, IP infringement claims etc. can easily turn a profitable acquisition into a giant money suck. A structure in which the seller, who is in a much better position to assess the potential for claims, holds onto all of those unknown (or undisclosed) liabilities is far simpler for both sides and allows the parties to concentrate on negotiating the going concern value of the business. So if tax considerations don’t strongly favor another structure, sophisticated parties tend toward asset purchases.Fred is right that asset acquisitions make it easier to cherry pick and that makes them useful in sales of divisions (that aren’t in a separate subsidiary), insolvency (the vast majority of sales from bankruptcy are asset acquisitions), and specialized situations where the parties want to tailor the assets purchased and liabilities assumed precisely. That’s not the majority of asset deals, though. Asset acquisitions are the most common form for acquiring an entire business. The reason, as I said, is unknown liabilities.Asset sales have the downside that the actual transaction is more complicated. You actually have to transfer all of the assets, which can be difficult (e.g. if there’s a lot of land or vehicles). You also have to assign all of the contracts and (if they exist) government licenses and permits, not all of which may be assignable. The assignment problem also comes up in stock purchases (depending on the specific terms of the contracts and licenses), but it’s much less common.It’s worth mentioning that companies are also acquired by merger. I think Fred is probably including that in “company sales,” which is generally right since the effects are generally similar.Again, Fred is right about the most common acquisition structure for VC backed companies. But I thought it might be useful to add a broader perspective.

    1. JLM

      Two quick points:As it relates to licenses, it is not uncommon to have a selling corp spin off the licenses to a wholly owned corporate sub and to use that vehicle to transfer the licenses thereby avoiding any liability pollution and regulatory requirements. Sub corp stock for sub corp stock. Spin off, stock exchange agreement or merger, absorption by new parent.Again, a good indemnification agreement is critical.As it relates to buying assets from a bankruptcy proceeding, the Court can be very useful as it will extinguish all claims as part of its bankruptcy proceeding thereby ensuring that the assets acquired are “clean”.You have to petition the Court to do this as they are not looking after the acquirer’s interests, they are looking after the interests of the debtor and creditors.

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