What is an Asset Deal?
An asset deal is the purchase of a target’s underlying assets (and often liabilities). The transaction involves transferring the ownership of assets and liabilities from the seller to the acquiring company. The acquisition is incorporated into the acquirer’s balance sheet just like the purchase of any other asset class.
The deal is the same irrespective on whether the target is a public or private company. There is no new subsidiary created and because no share price is mentioned, the price is based on the EV (enterprise value) of the target.
Key Learning Points
- An asset deal is the purchase of a target’s underlying assets and usually includes their liabilities
- Asset deals are less common than equity or stock deals and, in some countries, have significant associated taxation implications
- The accounting is the same irrespective on whether the target is a public or private company
- Asset deals are accounted the same as PP&E or any other asset, the cash balance decreases and the associated asset account increases
- Balance sheet cash is used to finance asset deals, but companies may be required to issue additional equity and debt to finance the transaction
Asset Deals Explained
Companies use this method when they are selling brands, for example. The selling corporation divests of the inventory, PP&E, receivables, payables, etc. for that brand by transferring the legal title to the buying company.
A common driver for asset deals is avoiding the consolidation of two different companies. Another driver for asset deals are situations where the buyer is keen to avoid assuming specific liabilities from the selling corporation. Examples include an underfunded pension liability or a large environmental liability.
Asset vs Equity Deals
The purchase of a business can be structured in two main ways. A straightforward method is buying equity from selling shareholders. This type of structuring allows the buyers to indirectly own all the assets of the business and assume all its liabilities.
In asset deals, the buyers buy the underlying assets and liabilities. Why liabilities? For example, if they are buying inventory, they are also buying the supplier relationships. Consequently, the buyers will have to take on the accounts payable as well. The shareholders are not directly involved in such transactions.
Asset deals are less common than equity deals
There are two main reasons for this:
- Asset deals can have significant tax implications in some jurisdictions. Vendors may pay tax on the sale of the assets and then again when they take cash out of the subsidiary.
- The practical procedure of changing title to all the individual assets is time-consuming and expensive. Similarly, it also involves a change of legal entity titles, which can also trigger renegotiations and client contracts’ retendering.
Accounting for Asset Deals
Asset and stock deals can be summarized as follows:
Enterprise value (asset purchase)
Debt and debt equivalents
Equity value (stock purchase)
The enterprise value is the value of the operational business, independent of the capital structure or the financing decisions. This is what the acquirer is purchasing in an asset deal. In this type of deal, only underlying net assets of the business are purchased, and no share price exists, only the enterprise value.
In a stock purchase, the equity value is purchased. This represents the operational assets less all liabilities purchased.
Asset Acquisitions Impact on Future Earnings
It is important to distinguish whether a transaction is an asset acquisition or stock purchase to determine the impact of the transaction on future earnings.
With an asset transaction the cost of acquiring the asset is initially capitalized, and then subsequently depreciated. In comparison, costs related to a stock purchase are expensed on or prior to the acquisition date.
When buying assets, the acquirer can capitalize the cost of bringing those assets into use along with the asset, which means they increase the future depreciation. When a stock deal is undertaken, the advisory fees are expensed straight away.