Asset Sales Explained- Making Sure You’re Prepared For the Deal

An Asset Sale is a business transaction where certain assets, and possibly some liabilities, are transferred to a buyer acquiring the business as a new owner. Small, privately owned businesses are most often sold as asset sales. According to the Small Business Administration (SBA) a small business can range from under 500 employees to up to 1,500 employees, depending on industry.

Commonly, only the assets needed to conduct business operations (operating assets) are included. Most buyers prefer to purchase the assets because there is less risk, unlike and equity sale where the buyer assumes all known and unknown liabilities from the beginning of the company’s existence. In an asset sale, the buyeronly assumes liability if it is explicitly identified, and the buyer agrees to assume it. In the case of a small business acquisition that will transfer to a new owner, the Asset Sale Price will include the operating assets, which comprises an average amount of inventory, fixed assets, and intangible assets (aka goodwill).

It is very important to note that there is no working capital part of the Asset Sale Price. Lenders will require working capital for an SBA loan, so you can buy it or borrow it. Buying it means adding it into the Asset Sale Price. Borrowing it would mean adding a line of credit. Bear in mind, the seller will retain cash in the bank account, receive all accounts receivable and pay off the accounts payable and any long-term debt at the time of sale, so adding working capital to the Asset Sale Price will likely negatively impact what they net from the buyer, which complicates making that type of deal desirable for the seller.

Let’s look at some example scenarios

SCENARIO 1: You want to buy company with a fairly set Asset Sale Price of $3,000,000 with includes Operating Assets (with normal inventory, fixed assets, and intangible assets) but no working capital:

SCENARIO 2: Let’s add working capital of $400,000 in accounts receivable to this deal as part of an offer:

SCENARIO 3: Equity Sale (same as SCENARIO 1):

 

These are the reasons you can typically either buy or borrow working capital in an asset sale deal. Here is what those scenarios would look like:

SCENARIO 4: $3,000,000 Asset Sale Price where buyer wants to purchase working capital of $400,000:

SCENARIO 5: $3,000,000 Asset Sale Price where buyer wants to borrow working capital of $400,000 :

Both deals are similar except in the purchasing working capital scenario, the buyer would receive the funds from collecting the accounts receivable vs. cash from the bank (at closing) in the borrow working capital scenario.