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Asset Acquisition – Common Assets Transferred and Related Warranties in the SPA – Part 2

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This blog is the continuation of the previous published blog where we analysed the most common assets transferred during an asset acquisition, the transfer process, and the warranties that a buyer should include in the SPA.

1. Stock and work in progress

The definition of stock will normally include raw materials, work in progress as well as completed goods. As it is difficult to value the amount of stock that will be available at completion, the amount is normally left outstanding until an evaluation is purported shortly after completion.

The possibility of disputes will be dealt with by an independent expert that is provided in the warranties of the SPA. The seller will be able to ask that the valuation is provided on the same basis as in the audited accounts or market value. The buyer will be able to set a limit on the amount of stock that he can buy and on the minimum stock that should be present in order to comply with the order requests.

2. Contracts

To ensure that the business is able to continue as it did prior to acquisition, the buyer will need to ensure that all the benefits of the contracts present within the business are assigned. For minor contracts or routine contracts the benefits will be able to be assigned from the seller to the buyer. In cases where consent is needed from a third party, then they can still proceed to completion on the basis that the buyer will take over the contracts but the seller will still be liable.

On more important contracts, which can be contracts with major customers or suppliers, the buyer should defer entering into the SPA until all the consents have been obtained. As the process of obtaining the consents from third parties might be a time consuming process, the buyer and the seller could enter into the SPA on the condition that the transfer of the contract is successful.

The warranties that the buyer will want to include relate to the nature of the contracts and on the possibility of a breach by the seller. The buyer will want to ensure that the contracts were entered into in the ordinary course of business, that there has not been any breach of contract or that the rights under the contract have not been waived. Termination and rescission will need to be kept in mind as the buyer should investigate whether an event has occurred that could bring the contract to an end.

3. Debtors and Creditors

Debtors are an asset of the company as a debt is a sum that is owed to the business. Creditors, will be highlighted as liabilities as this represents money owed by the company.

Debts will need to be legally assigned to the buyer as they represent a benefit for the company. Section 136 of the Law of Property Act 1925 will need to be fulfilled and written notice will need to be given to each debtor. Creditors will not be able to be assigned due to it being a burden of the company unless the seller is releasing them to the buyer with a novation agreement.

The buyer will want to ensure the debtors are assigned to him. This is due to the fact that the seller might be too aggressive in the recovery of the debt and the buyer will definitely want to keep a good commercial relationship with all the parties. The buyer will want the debt assigned so that they can start building a relationship with the debtors and will want the power of collection of debts.

The buyer will also want the creditors to be transferred to him too. This is again due to the full control that they can have on the business and again due to the creation of a good relationship with suppliers and the satisfaction of these debts.

4. Goodwill

Goodwill is sold during an asset acquisition which is important for both parties. If the business is sold as an going concern the value of the goodwill is going to be calculated on the good name of the business, on the reputation of the company and on the likelihood of people dealing with it in the future. This is normally based on the net profit of the business.

The buyer will want to ensure that the seller has not conducted the business in a manner which may have damaged the reputation of the business. Further restrictions that should be in place are that the seller will not be able to compete with the business, solicit customers, suppliers and employees. The buyer will need to ensure that the seller is the owner of all the assets and not subject to charges.