Asset purchase refers to the process involved in the buying of a company’s assets. Assets are resources owned by an individual, company, or corporation, both tangible and intangible, for the purpose of yielding profit.
Simply put, assets are things, either physical or not, that provide or are expected to provide benefit for the owner in the future.
There are many reasons while a company or individual may want to purchase assets. During an acquisition or just the startup of business are good reasons for companies to buy assets. The process of buying assets for a startup company or expanding a company is different from when one is acquiring another company as has to pick which assets to buy and which not to buy.
This involves assets like intellectual property, equipment, facilities, inventory, or stock in case of a Limited Liability company and vehicles, amongst others.
What is an Asset Purchase Agreement?
An APA, (asset purchase agreement) is when a buyer makes an agreement with a seller concerning assets being sold, along with the conditions involved.
It’s like a deal outlining the assets that the buyer in interesting in buying, the worth, and their selling conditions. This agreement is meant to prevent discord, future lawsuits, or claims of ownership and is usually a legal mechanism for processing mergers or acquisitions.
Apart from the exception of the oil and gas industry, all other companies use asset purchase agreement when buying into a new company. In an asset purchase agreement, there is a clear distinction between assets and stock that the Oil and Gas industry lack.
Why do you need an Asset Purchase Agreement?
When purchasing an asset, Asset Purchase Agreement plays a big role in determining what the assets are and controlling the purchase process. It makes sure that the purchaser has all the right authority to buy that particular asset, and the seller has the right to sell it. It answers questions about the worth of the assets and financial standing of both the buyer and seller.
But there are some pros and cons in the context of a merger or acquisition transaction. In an equity acquisition, the buyer buys a company along with all its assets. This also means that it inherits its liabilities as well. With the APA, the buyer gets to sit down with the seller and comb through all the assets and pick the ones that are most likely to generate the most income while forgoing some, if not all, the liabilities.
This whole issue of APA when buying assets may, however, bring about many changes in control problems. Like when an asset is changing hands, there is also a hand-down of control as well. Buyers may need to go out of their way to acquire consents and contracts to ascend the throne.
How to Handle Asset Purchase
When buying assets, the buyer does not have to worry about minority stakeholders in the company. Sometimes the seller still has a stake in the company when the buyer picks the assets, and the seller is left with the liabilities. This purchases usually tends to favor the buyer than it does the seller
There are particular ways to log-in your asset purchase based on how the purchase was financed. This affects your balance sheets and records in various ways. Recording the purchase and its effects on your balance sheet can be done by:
- Creating an assets account and debiting it in your records according to the value of your assets.
- Creating another cash account and crediting it by how much cash you put towards the purchase of the assets. Loans are not part of the cash account.
- Creating a loan account called a note payable account and crediting it by the amount of loan money used to fund the asset purchase.
- Determining if the asset bought is a current or non-current asset and logging or reporting it accordingly in your assets sections. Current assets are those converted to cash within 12 months, and non-current assets are those that take longer than that to convert to cash.
- Finding out your current cash balance by subtracting the cash cost of asset purchase from your initial cash balance. Put the result in the current assets section. The current cash balance is regarded as part of your current assets.
- Recording the loan amount used, which is the note payable in your liabilities section. It can be in the current of the non-current liabilities balance sheet section.
As it is with the current assets, current liabilities are those that can be recovered with 12 months and non-current are those that are expected to take longer than that. In a situation where all assets were paid for from the cash account, there is no need for a note payable report.
Example of Assets Purchase
Let’s assume you own a cosmetics company that’s generated an income of 100,000 from its sales saved in the bank. You have about 70,000 and owe a Shea butter and honey company about 20,000.
You have set your sights on purchasing a boutique down the street that is about to fold. You want to acquire this and merge businesses. Instead of just buying the whole place, you decide just to purchase its assets. After taking a look at the company’s inventory and assets and liabilities, you purchase the sewing kits and design for 60,000.
This means that although you lost 60,000 in cash, you gained sewing kits, which are meant to generate more cash for you. Although you have less cash in your cash account, you have increased the value of your assets without incurring any loss from liabilities.
Assets purchase is an unavoidable process when acquiring or merging a company or expanding yours as assets are a crucial part of any company. When purchasing assets, buyers have to make a clear distinction between what the assets and liabilities as so as not to incur most of their cost but focus on getting the best from the assets.
When dealing with assets purchase, it does not only refer to mergers and acquisitions, a startup business or an expanding one may need to acquire assets as well. A computer school buying desktops for their classrooms are also purchasing assets.