Even if your company offers strong growth potential, a business buyer may actually be more interested in something more tangible. For some buyers, an acquisition’s value lies in a specific set of assets.
Companies with valuable assets are in a strong position when negotiating a potential sale. Both parties, however, need to ensure that the deal preserves asset values for the buyer while providing fair compensation for the seller.
For some buyers, hard assets, such as real estate, are the main draw. Many business owners don’t realize that office or production facilities or investment properties peripheral to the business have appreciated significantly since they were purchased. If your region is experiencing a real estate boom, such assets could raise much-needed cash. Large equipment is another potential source of value — particularly if it’s already operated by trained personnel who can run it without significant downtime during an ownership transition.
In the technology, media/communications and other sectors, intellectual property (IP) can be extremely desirable. If you own patents and copyrights, even inactive ones, a buyer may want to pay for them.
Finally, consider the value of your ownership stakes in other businesses. Yahoo’s merger with Verizon was driven in part by the latter’s 15% stake in China’s massive online retailer Alibaba.
Framing the jewels
Before you put your company on the market, review your assets and rank them in terms of potential value to buyers. A third-party appraiser or providers of asset-based lending or sale leaseback capital can help you arrive at reasonable market values. It’s important to be vigorous in your assessment, as some assets that may initially seem insignificant could be precisely what a buyer is looking for. To that end, research recent acquisitions in your industry to gain an understanding of the kinds of companies and assets that seem to be in high demand.
If, when you’re ready to sell, a prospective buyer expresses interest only in certain assets, don’t reject the proposal out of hand. Buyers often keep their acquisition strategy private during deal negotiations. But you can probably gain insight into a buyer’s motivation by the types of questions asked and where its deal team devotes due diligence efforts.
If selling just assets doesn’t appeal to you, you can still push for a full acquisition by demonstrating how your company’s assets are connected to that of the larger company. For example, the value of a trademark may depend on your research and development staff’s continuing involvement. Or a real estate holding that benefits from tax breaks negotiated between the current owner and a municipality could become void if the property is transferred to another company.
The transfer and sale of a company’s assets can be complex and should be worked out in detail with professional advisors. (See “Make reps and warranties ironclad.”) Among the issues you’ll need to address are:
Document transfer. This can be a particularly contentious subject because IP might have been developed jointly with another party no longer affiliated with the selling company. So there may be restrictions on the transfer of such assets.
Taxes. Asset sales usually impose a heavy tax burden on sellers. It may be worth negotiating a deal for stock in your buyer’s company instead. Also watch out for unanticipated local and state taxes that may be triggered when you sell real estate.
Antitrust obstacles. State and federal regulators may treat the transfer of asset ownership as a red flag and decide to investigate your deal. That’s because acquiring new IP can give a company too great a competitive edge in a particular sector — for example, if a buyer acquires software that’s essential to many of its competitors’ products.
Working out assets
Asset sales can be a good deal for sellers, depending on your objectives. But such transactions are different from full company M&As, particularly from the perspective of minimizing taxes and transferring ownership. So be sure to work with advisors with experience in this area.
Make reps and warranties ironclad
The representations and warranties document is a heavily negotiated aspect of any M&A deal agreement. But when asset transfers are core to a business buyer’s strategy, the wording of this document must be ironclad.
Say that a seller wants to use a particular trademark postmerger. The reps and warranties document would need to guarantee this option and lay out exactly how the trademark can be used. For example, the buyer would be instructed to license the trademark to the seller after the transaction closes.
Other issues to address in a reps and warranties document are:
Ownership status. Does the seller fully own the assets it’s selling? Do other stakeholders need to be part of the transaction? Are there liens on these assets?
Protections. Are all copyrights and trademarks legally secured? Does any intellectual property infringe on the rights of a third party? Look for felony domestic violence for more information about legal and law services.
Seller obligations. What obligations does the seller have to help the buyer ascertain and secure asset ownership? What are the buyer’s rights in the event of lawsuits or other indemnification related to particular assets?