An asset purchase agreement is a legal contract that establishes the terms and conditions for the purchase of another company’s intangible or tangible property. This document may record the purchase of assets like patents, trademarks, client lists, machinery, supplies, and equipment. Note that you can only use this contract for purchasing assets without liabilities.
What Is an Asset Purchase?
An asset purchase is the action of an individual buying all or some of a company’s assets. Most asset purchases occur between two companies, but sometimes individual shareholders may participate in an asset purchase if they use a share sale to complete the transaction.
For a buyer, an asset purchase agreement is preferable to share sales because companies pick and choose which assets they wish to acquire without taking on the other company’s business liabilities (which could be considerable).
Asset Purchase vs. Stock Purchase
While you may hear individuals use the phrases “asset purchase” and “stock purchase” interchangeably, they have some key differences:
| Differences | Asset Purchase | Stock Purchase |
|---|---|---|
| Business Liabilities | The liabilities don't transfer to the buyer. | The liabilities transfer to the buyer. |
| Tax Basis | The assets are adjusted to fair market value (FMV). | The stocks aren't adjusted to FMV. |
| Tax Treatment | Capital assets are taxed as capital gains, while non-capital assets are taxed as ordinary income. | Taxed as capital gains. |
Understanding Capital Gains
Capital gains refer to the profits made on the sale of an asset if you sell it for a higher price than you purchased it.
Capital gains are divided into short-term capital gains and long-term capital gains. If you hold the asset for one year or less, the value of its short-term capital gains will be taxed as ordinary income.
If you hold the assets for longer than one year, any capital gains are taxed as long-term capital gains. The tax you have to pay on it depends on your overall income [1] :
- 0% tax rate if your income as a single person is less than or equal to $41,675
- 15% tax rate if your income as a single person is between $41,675 and $459,750
- 20% tax rate if your income as a single person is greater than $459,750
What Is a Capital Asset?
Assets eligible for capital gains include: [2]
- Stocks and bonds
- Household furnishings
- Personal property
- Jewelry
- Vehicles
- Real estate (residential or investment)
- Precious metals (gold, silver, etc.)
What Is Not a Capital Asset?
The IRS classifies the following items as noncapital assets:
- Trademarks, copyrights, designs, and other similar intangible property
- Inventory
- Real estate that a business uses
- Accounts receivable (AR) from a barter agreement
When to Use an Asset Purchase Agreement
You can use an asset purchase agreement in a number of situations, such as:
- To limit purchases to business assets, as opposed to the business itself
- As part of a larger business purchase
- When purchasing specific assets
- In joint venture situations
- When the purchase of a specific asset isn’t covered by other purchase agreements you have with a seller/buyer
What to Include in an Asset Purchase Agreement
Some key sections to include in an asset purchase agreement include the following:
1. Demographics and Date
You need to include basic demographic information about the sellers and buyers. You should include the names, contact information, and addresses of all sellers and buyers involved. Don’t forget to include the date of the agreement as well.
2. The Asset Information
You need to include information about the asset being sold. For example, if the buyer is purchasing real estate, you need to include the appropriate address and a property description.
3. Purchase Price and Payment Information
You should specify the purchase price being agreed to by the buyer and seller. You also need to specify how the buyer is going to make the payment. A few options include cash, check, credit card, or wire transfer.
Don’t forget to include any money that the buyer is being credited with prior to the issuance of the final payment, the amount of money due when the agreement is signed, and any additional installments that will be made in the future.
4. Taxes
Do not forget that there will be some taxes that follow this transaction. You need to specify who is going to be responsible for paying the taxes and when they’re going to pay them. A few examples of taxes that might be paid include sales taxes and property taxes.
5. Ownership Transfer
You should specify when the buyer is going to take possession of the property from the seller. You should also specify that the seller is responsible for keeping the property in its present condition until that time.
The seller should also specify that the asset is being sold without any liens or liabilities against it. If there are liens or liabilities on the property, the buyer needs to be made aware of them and agree to take possession of the property with those intact or paid off.
6. Governing Laws
The agreement should also specify which location’s laws govern the execution of this transaction.
7. Legal Disputes
If there’s any dispute related to this agreement, the agreement should specify the court system that will be responsible for resolving these disputes. The agreement should also specify whether mediation or binding arbitration will play a role in resolving any of these disputes.
Asset Purchase Agreement Sample
Below you can download an asset purchase agreement in PDF or Word format:
