In an asset purchase transaction (also known interchangeably as a business purchase), the buyer takes over the target business by acquiring a collection of specified assets and rights, and sometimes assuming responsibility for certain liabilities, which together comprise the target business.
The question of exactly which assets, rights and liabilities of the target business will be transferred to or assumed by the buyer as part of an asset purchase deal is a matter for the parties to negotiate.
Advantages to acquiring a hotel via asset purchase
- On an asset purchase deal, it is therefore easier to leave behind unwanted or problem assets, liabilities and contracts. This may be relevant where the hotel has been managed by a third-party manager who has negotiated contracts which relate not just to this hotel but to a wider portfolio of hotels.
- For the purposes of calculating the base cost for capital gains tax (and corporation tax on chargeable gains), the assets will generally be treated as being acquired for the contractual purchase price. It is likely that this figure will be higher than the seller’s original acquisition price. The higher base cost can therefore be set against any proceeds arising from the buyer’s subsequent disposal of the assets.
- Likely a cheaper, simpler and quicker transaction to be able to exchange than a share sale. However due to the possible TUPE process requirements or the need to seek landlord/ third-party consent, it may not be quicker to complete.
- On an asset deal the seller may be more receptive to standing behind the warranties themselves thereby saving warranty insurance costs. This is because the warranties and the warranty process tend to be lighter on an assets deal.
- No need for pre-sale corporate structuring to hive-up assets into a corporate vehicle in preparation for sale. The shape of the group does not therefore need to have been organised with a future exit transaction in mind.
Disadvantages to acquiring a hotel via asset purchase
- Stamp duty land tax is charged at rates of up to 5% on commercial property, whereas stamp duty on the transfer of shares is charged at just 0.5% on the purchase price. An asset purchase buyer will not usually inherit tax liabilities and so no tax input will be required on an asset purchase deal.
- Key hotel systems such as the guest management system, booking system, central services and support, together with accounting and payroll support systems are less likely to be included in the sale. A buyer will need time to identify replacement providers and is more likely to require a transitional services agreement for a period while it gets the hotel ‘on its feet’.
- A deal will need to be reached in respect of existing trade debts. Thought must be given as to whether these should be acquired by the buyer and whether the buyer is expected to pay for them. What rights or obligations will there be to collect any such trade debts post-completion and whose responsibility will it be?
- As a split exchange and completion is more likely with an asset sale, a buyer will likely need to fund the deposit at exchange (typically 10% of the purchase price). The risk associated with the period between exchange and completion will also need to be dealt with in the contract. The parties will need to comply with protections imposed by TUPE including running a consultation process, confirming any measures to be taken and a series of mutual indemnities in the asset purchase agreement. Where senior staff are engaged on a ‘cluster’ basis across several hotels, it will need to be determined whether they spend most of the time working for the hotel being sold or for other hotels.