Most small business sales are what’s known as an “asset sale,” because the buyer is not purchasing the business entity or the stocks or shares of the company. The buyer will be creating a new business entity to operate the business with, and they are simply purchasing the tangible and intangible assets of the business that is for sale. So, naturally, in a business asset sale, it’s important to identify the specific tangible assets being purchased. Furthermore, buyer and seller need to be on the same page as to which intangibles will be included in the sale of the business. Including a detailed Asset List as part of the asset purchase contract or purchase agreement is the way that we ensure that all parties agree and are aware of the actual assets transferring to the new owner.
The first and most obvious items that should be on the Asset List are the tangible assets. Tangibles are the things that you can touch, such as vehicles, tools, equipment, furniture, electronics, etc. This collection of tangible assets is often referred to as FF&E, or Furniture, Fixtures, and Equipment. The seller is going to create the Asset List, so it is their responsibility to go through their list of assets to specifically identify each item and put it on the list. Tangible assets should be described using as much detail as possible, for example: “2021 Atric Air AF49 commercial freezer in stainless steel.” Taking it one step further for the high-dollar items, they should have some unique identifier such as a serial number or VIN number for vehicles. This ensures that the buyer can verify that the equipment that is on the list is the same equipment that they are getting at closing. Unfortunately, 'bait and switch' has happened to buyers in the past, where the buyer thinks they are getting a relatively new commercial freezer, and then right before closing it is switched out with something that is not comparable. That’s obviously something that is unacceptable, so having the unique identifiers ensure that everything is on the up and up where the Asset List is concerned.
The question often comes up with sellers, “Do I really have to list every individual hammer and screwdriver?” In a business of a substantial size, that task would really seem impossible. So, in the scenario of small tools, usually the seller will just have a line item on the Asset List that reads something like “assorted small hand tools.” It would be down to the buyer if they wanted to count and identify each and every one of these so see what they were actually getting.
Most purchase contracts will state which intangibles are included, but normally it’s done generally, and lacks specifics, such as “website, email address, phone number, social media” etc. That leaves room for misunderstanding between buyer and seller as to exactly which intangibles are included with the sale. So, it’s important for the seller to identify exactly which intangibles are being sold. For example, www.bestcontractor.com, all current email addresses associated with bestcontractor.com, firstname.lastname@example.org, 813-555-5555, 888-555-5555, 941-555-5555, twitter: @bestcontractor, Facebook: @bestcontractorFL, Instagram @FLbestcontractor etc. If all the intangibles are specifically listed out with all of their unique identifiers then there will be no question as to exactly what the buyer is getting after closing.
If a buyer wants to add other intangibles to the Asset List such as a complete customer list, specific financial records like Quickbooks files, physical invoices for the past 3 years for example, then they can request that those items be added; however, most of these items can be difficult to specifically identify and are usually covered in the purchase contract as well. Check with your business broker on this one.
The plan for transferring these intangibles should be discussed between buyer and seller and is usually handled after closing during the familiarization period. We will feature a separate blog in the near future to map out how the transfer of all of the intangibles typically works.
Assets Not Owned by the Seller
A seller needs to be very careful that they don’t add assets to the Asset List which they do not own or have the rights to sell. Most business asset sales are sold debt-free, so any equipment being conveyed with the sale should be free of any encumbrances or liabilities at the time of closing. If there are payoffs of vehicles or other equipment for example, the closing agent will usually handle that at closing. Also, many businesses have equipment that is leased. Unless the buyer will be assuming the lease of that piece of equipment, it will not convey with the sale and the seller will have to take care of settling any liabilities on said equipment. A seller needs to make any potential buyers aware of any equipment on the Asset List that is borrowed or leased. It could be as simple as a notation that is it leased or borrowed from a vendor.
Some equipment, such as soda fountain machines, are commonly borrowed from a vendor, and as long as that business utilizes that particular vendor then the new buyer should be able to continue using it, but the buyer would need to verify that with the vendor. The point is that the buyer needs to be made aware of any assets that are not actually owned by the seller, which will then prompt the buyer to dig deeper into how they can continue utilizing said piece of equipment.
Asset List is Part of a Purchase Contract
It’s important for all parties to remember that the seller-supplied Asset List is part of the purchase contract. It needs to be included with the purchase contract, and it should be signed and dated by both buyer and seller to ensure that everyone understands exactly what is conveying with the sale of the business.
Any changes to the Asset List need to be made in writing, and then acknowledged by all parties via signatures. These businesses being sold are operational for months while the business is for sale and then when it is under contract and going through the closing process. Equipment breaks and needs to be repaired or replaced on a regular basis, as that is the normal course of business. If a business is simply listed for sale, then the seller just needs to let their business broker know which equipment has been swapped out and then the changes to the Asset List should be made before presenting the list to a potential buyer. If the business is already under contract when a piece of equipment needs replacing, then the seller should replace the piece with a comparable alternative. The buyer needs to be made aware of this change, and then both parties will need to agree and sign off on this change to the Asset List. The key to keeping everyone happy here is communication, so it really is in the seller’s best interest to communicate any changes in equipment as soon as it happens.
The buyer typically inspects the equipment as part of the Due Diligence period. Beyond that, the equipment needs to be in good working order at closing, and the buyer has the right to re-inspect the equipment at that time to ensure that it is the same equipment listed on the Asset List and it is in good working order, just as it was when they did their equipment inspection during Due Diligence.