Asset purchase price: Overview, definition, and example
What is asset purchase price?
The asset purchase price refers to the total amount a buyer agrees to pay for specific assets in a business transaction, rather than purchasing the entire business as a whole. This can include tangible assets like property, equipment, and inventory, as well as intangible assets such as intellectual property, goodwill, and trademarks. The asset purchase price is typically negotiated between the buyer and the seller and is specified in the purchase agreement.
Unlike a stock or share purchase, where the buyer acquires the entire company including its liabilities, an asset purchase involves only the specific assets that the buyer wishes to acquire. This allows the buyer to avoid taking on unwanted liabilities or other obligations of the business.
Why is asset purchase price important?
The asset purchase price is important because it determines the value of the assets being acquired in the transaction. For the buyer, it ensures they are paying a fair price for the assets that meet their needs. For the seller, it establishes the value they will receive for the assets they are selling, which can include both physical property and intangible business value.
The structure of the asset purchase price can also have tax and legal implications. For example, the buyer may want to allocate a higher portion of the purchase price to certain assets that are depreciable or have a more favorable tax treatment. Similarly, the seller may focus on receiving payment for assets that generate capital gains rather than ordinary income.
Understanding asset purchase price through an example
Imagine a company, ABC Corp., wants to sell a portion of its business that includes inventory, equipment, and intellectual property but does not want to sell its entire business or liabilities. A potential buyer, XYZ Ltd., agrees to purchase these assets for a total of $1 million. The buyer and seller negotiate the price based on the value of the assets involved, and the purchase price is broken down as follows:
- Inventory: $300,000
- Equipment: $400,000
- Intellectual property: $300,000
In this case, the asset purchase price is $1 million, and XYZ Ltd. will only take ownership of the assets listed in the agreement without assuming any liabilities from ABC Corp., such as debts or pending lawsuits.
In another example, a small business may sell its equipment and patents but keep its employees and customer contracts. The asset purchase price in this case will only cover the sale of the equipment and patents, not the entire business, and will be determined based on the market value of those assets.
An example of an asset purchase price clause
Here’s how an asset purchase price clause might look in a contract:
“The Buyer agrees to purchase from the Seller the following assets for a total purchase price of $1,000,000, consisting of: (a) inventory valued at $300,000, (b) equipment valued at $400,000, and (c) intellectual property valued at $300,000. The Buyer will pay the total purchase price at closing in the form of [insert payment method], and the purchase price is subject to adjustment based on the final value of the assets at closing.”
Conclusion
The asset purchase price is a critical component of business transactions where specific assets are being bought and sold. It defines the value of the assets being transferred, helps protect both parties by clarifying what is included in the deal, and has implications for taxes and liabilities. By negotiating the asset purchase price, both buyers and sellers can ensure that the transaction is fair, clear, and aligned with their business goals.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.