Asset purchase of a business with existing contracts in place
January 15, 2023
by a searcher from Georgetown University in Washington, DC, USA
Has anyone completed an asset purchase of a business with existing contracts in place without compromising those contracts?
An example of this would be the purchase of a construction company that has a sales pipeline of signed contracts that are between the existing corporate structure and the customer. Since an asset sale would mean the creation of a new entity, those existing contracts between the existing entity would not be enforceable by the new owner since the new owner didn't acquire the equity of the existing company.
I'm looking for creative ways to effectively have my cake and eat it too. Has anyone done this before? I'm game for open conversation, hypothetical or otherwise.
Thanks everyone!
from University of Florida in Boynton Beach, FL, USA
Working capital. Progress billings & deposit balances in your closing WC calculation - for example over-billing liability is rarely accounted for in small businesses but is an opportunity for the seller to pull forward revenue with progress billing unless you have strong tools to prevent it.
Timing. Operationally it took about 45 days for the new entity to get licensed by the state (FL) and another 3 months to get the necessary consents for assignment and permit paperwork. Along the way we also had to register the new entity with each local building department and pay permit transfer fees, which is just another moving part and cost. So every single contract took signatures by me, the seller, the GC, the property owner, and the building department. Some building departments required original wet signatures hand delivered during their 4 hour office hours, so we had to send somebody across town or pay a permit expediter a couple hundred bucks to go stand in line.
Cost. We also had to carry duplicate insurance policies during the overlap period to cover both entities.
All in all just takes a lot of organization but not that bad. If you can pull off a stock sale, go for it. But in my experience most small businesses have so much tax / employee / other liabilities a stock sale would be hard to pull off.
Hope that helps! Send me a DM if you want to talk on the phone.
from The University of Chicago in Chicago, IL, USA
a) Few years ago, we sold a commercial window mfg. and installation business. Customers were colleges and large GC. Buyer did an Asset purchase w/o contacting the customers. Buyer brought in deeper and broader experience in the industry.
b) We just did a deal with a Searcher. Seller had many small customers (financial institutions like). Buyer studied the decision-making process of the customers and concluded that customer's approval process is difficult; also difficult for them to cut off and find a replacement overnight. So, buyer bought w/o contacting the customers. This way continuity was maintained. Buyer communicated with customers post-closing.
c) If you make an asset purchase, make sure the new entity has more or less the same name. And, work through how the funds coming into account with old EIN come to you.