Acquisition Financing for Asset Purchases: What Changes and Why it Matters?

Asset purchases are a common deal structure in acquisition financing and bring value to the buyer in several ways. Unlike a stock purchase, where the buyer gets the entirety of the Company’s assets and liabilities, an asset purchase is a more targeted, almost surgical approach to acquisition financing.

They are prevalent with smaller-sized deals, especially in an add-on acquisition scenario as part of an acquisition financing driven roll-up. With an asset purchase, the buyer owns the asset free and clear and is shielded from all liabilities.

Often, there may be undisclosed liabilities or commitments lurking beneath the balance sheet that a seller does not openly disclose during due diligence, despite making representations and warranties. If a buyer purchases the stock, they have exposure to these claims and will seek to recover these amounts from the seller via the indemnification cap in the stock purchase agreement.

With an asset purchase, the buyer does not have to worry about such claims and has peace of mind. This makes the deal easier to document in the legal stage and reduces the overall risk for the acquisition financing lender.

Working Capital Considerations in Acquisition Financing

With an asset purchase, especially one comprised of inventory, fixed assets, and intangible assets (customer lists, goodwill, and a non-competition agreement), buyers have to analyze their working capital need closely. Most sellers will prefer to keep their cash and accounts receivable, so the buyer will need to bring their own working capital in the form of cash or a line of credit.

Depending on the business, working capital can be a large amount relative to the amount of acquisition financing used to purchase the assets. Buying assets without factoring in working capital is similar to buying a car with no wheels.

Acquisition financing providers understand this principle and will allow the buyer to use their loan to fund the initial buildup of working capital. Finally, asset purchases provide tax benefit through writing up the basis of the acquired assets. By allocating purchase price to depreciated assets, buyers benefit from a tax shield which reduces their tax liability.

Asset deals often cannot be used, especially if a key agreement is unassignable. In these instances, and in situations where the seller has negotiating leverage, stock deals are the norm in acquisition financing deals.

Asset purchases are advantageous for buyers on the legal and tax side but do not change the overall funding amount needed to have a successful deal.