What Does
Asset Sale Mean?
An asset sale is completed only when the assets (as opposed to the common shares) of a company are acquired by a buyer. The buyer may incorporate a new company or use an existing company to acquire selected assets, along with management and contracts. This means the seller that sold the assets retains ownership of the company, and must pay all of the existing liabilities and debts before taking the net cash proceeds.
An asset sale carries much less risk for a a buyer since any liabilities (disclosed or undisclosed) as well as any contingent expenses (e.g., pending litigation or tax reassessments) stay back with the selling company. The due diligence can then focus on vetting the fair market value of the assets being acquired, as well as the quality of the contracts and employees being transferred over.
Divestopedia Explains Asset Sale
With an asset sale, there is considerable change during and after the transaction close that needs to be managed.
At transaction close, the buyer must ensure that the acquiring company is able to continue doing business with the new assets (e.g., permitting and licensing), employees have been laid off from the selling company and rehired by the acquiring one, and all supplier and customer contacts that are being assumed have been legally transferred. Major customers need to be approached to ensure they will consent to the transfer of their contract or else the buyer risks having the contract renegotiated. Post transaction, the buyer must ensure revenue is invoiced by the acquiring company and payments go to the new company rather than continue being sent to and deposited by the selling company.
Despite the additional integration management, buyers typically prefer an asset sale because they get to write-up the assets for tax purposes and can also leave behind any liabilities or other potential "skeletons" that the selling company may have. All of this is part of the deal in a share sale.