Companies that buy companies have several options. One variant: the asset deal. What does the term mean? What are the advantages of this procedure? What are the practical implications?
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What is an Asset Deal?
The term asset deal refers to a type of company acquisition. The special feature is that assets such as land, buildings, plant, machinery, rights, patents and inventories are acquired individually and transferred to the buyer. Assets owned by the shareholders and used in the Company are not transferable. These may, for example, be land used for business purposes but privately owned by a shareholder.
Unlike the share deal, no company shares are acquired in the asset deal. Rather, there is a choice of which assets to buy or sell. It is also possible to carry out a business transfer with the transfer of individual assets. In this case, the existing employment relationships are also transferred to the buyer. At the end of the "sell-out" only the company remains as an empty shell.
Asset deal: motives, advantages and disadvantages
The purchase of individual assets is associated with a not inconsiderable effort. For example, each asset to be sold must be included separately in the purchase agreement. In addition, a precise description of the affected assets is required, as these must be clearly identifiable. Designations, locations and values can, for example, be determined with the aid of inventory lists and partly also from balance sheets. In complex scenarios, there is a risk of losing the overview. The valuation of intangible assets (e.g. brands, patents, know-how, company names) is also difficult.
For the buyer it can be nevertheless worthwhile to operate this high expenditure. There are several reasons for this. The main advantage of the asset deal is that the buyer can select each object of purchase individually and also examine it in advance. The following factors are also considered to be advantageous:
- Lower risk than with the "complete purchase" of a company (minimized liability risks)
- Avoid hidden liabilities
- No purchase of a shell company
- Most costs can be billed and deducted
- If insolvency has already occurred: no liability for liabilities to employees
Does an asset deal have to be accounted for in accordance with IFRS 3?
IFRS 3 (International Financial Reporting Standard 3) is an international standard governing the accounting for business combinations. For example, IFRS 3 generally states that both acquired assets and liabilities must be recognised in the balance sheet at their fair value at the acquisition date.
If a buyer acquires another entity (or a significant part of another entity) through an asset deal and a parent/subsidiary relationship (control) arises, IFRS 3 must be applied in the separate and consolidated financial statements.
What role does the asset deal play in real estate?
As mentioned above, properties can also be acquired individually as part of an asset deal. This is done by means of a notarised purchase agreement. The acquisition is also entered in the land register. It should be noted that land transfer tax is incurred in this case. It is also important to make some arrangements between the parties:
- Who is responsible for warranties?
- Which uses and burdens are transferred to the buyer?
- Should existing contracts (rental contracts, leasing contracts, purchase contracts) be taken over?
Asset deal in (threatened) insolvency proceedings
The acquisition of a company via asset deal is particularly important in the event of impending or ongoing insolvency. In general, assets are particularly cheaply available in these scenarios. If the buyer acquires the company before the insolvency proceedings are opened, the debts may remain with the seller, but there is a risk: If the total proceeds from the sale are not sufficient to satisfy the creditors, an insolvency petition must still be filed. In such cases, the insolvency administrator could challenge the transaction on the grounds of creditor disadvantage and retrieve the assets. The buyer then receives the purchase price back only in the amount of the insolvency quota.
The aforementioned risk can be ruled out if the buyer of the company waits for insolvency. In this case, the asset deal is settled directly with the insolvency administrator. However, the insolvent target company naturally has a flaw and is sometimes more difficult to restructure. However, in certain scenarios this may be acceptable.
Further advantages when acquiring from the insolvency administrator ("transferring reorganization") are:
- Buyer shall not be liable for employee claims arising prior to the opening of the proceedings
- Simplified personnel reduction through instruments under insolvency law
- In the event of continued operation: no liability for old liabilities (in particular back taxes)
What effects does an asset deal have on employment contracts?
In addition to tangible assets, employment contracts can also be the subject of an asset deal. In this case, not only the shareholder of the company changes, but also the employer. This has far-reaching legal consequences. At the centre of this is § 613a BGB, which regulates the rights and obligations at the transfer of business. Attention: This paragraph also applies if no special agreements regarding the employment contracts have been made in the sales contract (see following section).
Transfer of Business in an Asset Deal: What Is to Be Considered?
All assets that are not listed in the company purchase agreement remain with the seller as part of the asset deal. However, labour law is an exception: In the event of a transfer of business, the BGB (§ 613a) ensures that all employment relationships are transferred to the purchaser in the event of an asset deal. This happens automatically and even if no contractual arrangement has been made. Partly this remains unnoticed by the buyer at first even!
When there is a transfer of an undertaking must be clarified in each individual case. If this is the case, the employees must be informed. They shall then be entitled to object to the transfer of business so that their employment relationships are not transferred to the purchaser.
Transfer of customer data and contracts for asset deals
Within the framework of asset deals, existing contracts can also be transferred. For customers of the company to be sold, this means that they suddenly have a new contractual partner. From the customer's point of view, however, this is not always desirable. The legislator has therefore created a number of regulations for the transfer of contracts. Thus § 415 BGB states that debt assumption (= contract assumption) is only effective if the customer expressly agrees.
In addition, data protection aspects must be observed if the customer base is to be taken over (in whole or in part). Since personal data is transferred in this case, the regulations of the European Data Protection Basic Regulation (EU-DSGVO) apply. Thus, data transmission may only take place if the customer has given his effective consent. However, since it is difficult to obtain such consent in practice, the DSGVO offers another option for asset deals: The transfer of customer data may take place if the company seller has a "legally legitimate interest in the transfer" and "conflicting interests of the affected parties do not outweigh".
Asset deal with sole proprietorship: What are the special features?
Of course, in practice there is not only interest in taking over a partnership or a corporation. The purchase of sole proprietorships is also conceivable. However, as the individual enterprise does not have its own legal personality, no sale of shares is possible. In this case, the asset deal is the only possible form of transaction. The assets are legally separated from the previous company owner (the sole proprietor) and assigned to the buyer. It should also be noted that the operation is accompanied by a change of ownership. This change must be entered in the commercial register.
Asset deal or share deal?
The alternative to the asset deal is the share deal, in which buyers acquire all (or almost all) shares in a partnership or corporation. It is therefore not possible to specifically select individual assets. Another difference is that the acquirer is liable for the seller's liabilities in the share deal. The balance sheet of the acquired company remains unchanged.
If the company acquired by way of a share deal is in an economic crisis or even on the brink of insolvency, the buyer is obliged to file for insolvency if necessary. The share deal is therefore not attractive in crisis situations. In healthy companies, on the other hand, it is the more popular and more frequently used variant. There are two main reasons for this:
- The contract design is significantly leaner (no detailed listing of assets necessary).
- It can be contractually regulated that the seller is also liable for the acquired assets (condition and inventory).
Balancing opportunities and risks with due diligence
Before deciding between a share deal and an asset deal, a due diligence should take place. This term comes from business and legal jargon and stands for careful examination. With regard to acquisitions, due diligence means that the target company is analysed in detail. This applies in particular to the economic situation, liability risks and the volume of tax write-downs.