If you’re selling your startup, the chances that the transaction will be an asset deal are probably low. What is an asset transaction? It’s where the Purchasing company buys specific assets and liabilities of the selling company. The assets bought must be listed in a purchase agreement. After the deal closes, the Purchaser owns the assets and liabilities it purchased, while the selling company remains intact and owns whatever assets and liabilities not sold. Transferring assets comes with its own headaches because the title to each asset transferred must be good. To ensure the validity of the titles, there will probably have to be a (sometimes lengthy) due diligence process. Also, startups tend not to have many assets, except maybe some computers, furniture, and of course, intellectual property.
Still, if you’re going to do an asset deal, here are some points to keep in mind.
- The Purchaser gets to avoid certain assets – If your startup owns some assets that the Purchaser does not want (spent too much on kegs, foosball tables, and Xbox Kinects?), then the Purchaser can decide to pick up the assets its wants in a piecemeal fashion. This means that the Purchaser can avoid having certain assets on that may not look good sitting on the books. You may be able to negotiate more favorable terms for certain assets since you know the Purchaser is only interested in them.
- Too much cash on hand – It’s rare that a startup might have too much cash on hand. In that rare event, the Purchaser might not want to buy the cash, so it will negotiate for only some of the assets for a lower overall price. See #1 above.
- It takes time and money – An asset deal involves due diligence and to make sure each title is valid. This not only means more time but it also means more legal fees.
- Some assets cannot be sold – In some cases, when assets are purchased, there may be a provision in the contract that states the assets can’t be sold to another party.
An asset deal is more costly and complicated than a stock purchase deal. It’s unlikely that you or your purchaser would want to do an asset deal (though if the purchaser is going to pay your lawyer’s fees, then your lawyer would certainly not mind). Still, there are a few situations where an asset deal might make sense. If your company has one or two valuable assets, a lot of stuff that no one wants to buy, and an interested purchaser, you might find yourself in an asset deal.
(photo courtesy of: http://flic.kr/p/7Qnyu7)