Key Takeaways
- Offer is a buyer's formal proposal to purchase assets.
- Partial offers select specific assets, avoiding liabilities.
- Complete offers acquire nearly all assets, often liquidating seller.
- Buyers gain tax benefits via stepped-up asset basis.
What is Offer?
An offer is a formal proposal by a buyer to purchase specific assets or equity from a seller, often framed as an asset purchase agreement in business transactions. This allows buyers to selectively acquire valuable assets without assuming all liabilities or obligations of the seller.
Offers differ from stock purchases by focusing on tangible and intangible assets, enabling strategic acquisition and risk management.
Key Characteristics
Offers have distinct features that affect both buyers and sellers. Key characteristics include:
- Selective acquisition: Buyers choose specific assets like equipment or intellectual property, avoiding unwanted obligations.
- Asset types: Includes tangible assets (inventory, machinery) and intangibles (customer lists, patents).
- Tax implications: Buyers gain a stepped-up basis for depreciation benefits, while sellers may face higher ordinary income taxes.
- Risk management: Buyers avoid assuming liabilities common in C corporation stock purchases.
- Payment terms: Often negotiated as cash, debt, or equity, with earn-outs tying payments to future performance.
How It Works
The offer process begins with valuation, where buyers assess asset worth using market comparables or appraisals for both tangible and intangible items. A non-binding letter of intent outlines the proposed terms, assets included, and price.
Following due diligence to verify asset conditions and legal compliance, parties negotiate final terms, including warranties and representations. At closing, assets transfer ownership, often requiring new registrations and tax IDs. Buyers may use debt financing to fund the purchase, as seen in transactions involving companies like Bank of America or JPMorgan Chase.
Examples and Use Cases
Offers are common in various industries where selective asset acquisition is advantageous:
- Airlines: Delta may acquire specific fleets or maintenance facilities rather than entire companies to optimize operations.
- Financial services: Firms like Bank of America selectively purchase loan portfolios or technology assets to expand capabilities without full mergers.
- Technology: A company might offer to buy a competitor’s patents and customer contracts, excluding liabilities, to gain market share quickly.
Important Considerations
When evaluating an offer, carefully consider the tax consequences and potential liabilities that remain with the seller. Buyers should also assess the complexity of transferring assets, including regulatory approvals and compliance.
Consulting experts familiar with asset sales can help balance the benefits of a stepped-up basis and depreciation rules, such as the half-year convention for depreciation, against the seller’s potential tax burden and operational impacts.
Final Words
An asset purchase offer allows you to selectively acquire valuable assets while limiting liabilities, making it a strategic tool for risk management and tax planning. To move forward, carefully evaluate the assets and structure your offer to align with your financial and operational goals.
Frequently Asked Questions
An offer to buy an asset is a formal proposal from a buyer to purchase specific tangible or intangible assets from a seller. It is usually structured as an asset purchase agreement that allows buyers to selectively acquire assets without taking on all the seller's liabilities.
In an asset purchase offer, buyers acquire selected assets rather than the entire company, which helps minimize risk and tax exposure. Unlike stock purchases, asset deals avoid assuming the seller's full liabilities and allow for more targeted acquisitions.
There are two primary types: partial asset purchases, where buyers select specific assets and leave liabilities with the seller, and complete asset purchases, where nearly all assets are acquired, often leading to the seller's liquidation.
An earn-out is a supplemental payment tied to the post-sale performance of the acquired assets. It helps bridge valuation gaps between buyers and sellers by linking part of the purchase price to future results.
The process includes valuing the assets, drafting a non-binding letter of intent, conducting due diligence to check for liens or compliance issues, negotiating the purchase agreement terms, and finally closing the deal with asset transfer and setup of new accounts.
Offers can include tangible assets like equipment, inventory, and real estate, as well as intangible assets such as customer lists, patents, trademarks, and goodwill, depending on what the buyer wants to acquire.
Buyers benefit from a stepped-up tax basis, which resets asset values to fair market value and allows for fresh depreciation or amortization deductions. This can result in significant tax savings over time, especially on assets like equipment.
Sellers may retain liabilities left behind, face potential tax hits on gains, and deal with more complex asset transfers. In complete asset purchases, sellers risk double taxation and losing the company’s legal entity shell.
