Asset Disposition: Structure, Tax, and Liability in Asset Sales

In an asset sale, the buyer selects which assets to purchase and which liabilities to assume. Environmental liabilities follow the asset in most circumstances, regardless of how the contract allocates them. That is the first risk buyers underestimate. In a stock sale, the buyer acquires the entire entity. All liabilities come with it, including unknown or contingent ones. Sellers generally prefer stock sales for tax reasons. Buyers generally prefer asset sales to avoid inheriting legacy liabilities. The wrong choice can trigger unexpected tax bills, environmental cleanup obligations, or successor liability claims.

Asset purchase counsel evaluates the relative advantages of an asset sale versus a stock sale for the specific transaction, identifies the liabilities the buyer will and will not assume, and advises both parties on the structural implications before term sheet negotiations begin.

An asset purchase agreement (APA) is the governing contract for an asset sale. It identifies purchased and excluded assets, defines assumed and excluded liabilities, and sets out the seller's representations and warranties. The purchase price allocation schedule is attached to the APA. It governs how the total consideration is spread across asset classes under Section 1060 of the Internal Revenue Code. A poorly drafted APA leaves gaps. Gaps become disputes after closing.

Asset purchase agreement counsel drafts the APA, negotiates the asset and liability schedules, and structures the representations, warranties, and closing conditions to provide the buyer with actionable recourse and the seller with defined post-closing exposure.

In an asset sale, the seller recognizes gain on each transferred asset separately. Capital gains rates apply to appreciated assets held more than one year. Ordinary income rates apply to accounts receivable, inventory, and goodwill attributable to a covenant not to compete. The purchase price allocation governs how the total consideration is spread across asset classes. Buyers want maximum allocation to depreciable assets for larger future deductions. Sellers want minimum allocation to ordinary income assets.

Business sale transactions counsel structures the purchase price allocation to optimize the after-tax proceeds for the seller, analyzes the tax impact on the buyer's depreciation schedule, and identifies planning strategies that align the parties' respective tax positions.

Depreciation recapture taxes sellers when a business asset sells above its adjusted tax basis. Section 1245 governs personal property; Section 1250 governs real property. That excess is ordinary income, not capital gain. Unrecaptured Section 1250 gain is taxed at a maximum rate of 25 percent. Sellers who model recapture exposure before negotiating often discover that the after-tax proceeds are materially lower than the headline price.

Mergers and acquisitions counsel models the full tax impact of the asset sale for the seller, including depreciation recapture under Sections 1245 and 1250, purchase price allocation under Section 1060, and capital gains exposure on each transferred asset category.

Successor liability is the doctrine by which a buyer inherits the seller's liabilities without agreeing to do so. It arises under four theories. The UCC bulk transfer rules add a fifth exposure point in states that still require creditor notice before an asset sale. Environmental liabilities are the most significant successor liability risk. The APA's excluded liabilities schedule must be drafted with all of these theories in mind.

Corporate dissolution and liquidation counsel evaluates the successor liability exposure specific to the seller's business, industry, and asset base, and structures the excluded liabilities schedule to provide the buyer with the maximum available contractual protection.

Indemnification provisions allocate post-closing liability between buyer and seller. Escrow accounts hold a portion of the purchase price as a liquid recovery fund. The survival period defines how long the representations and warranties remain actionable after closing. Basket and cap provisions limit the indemnification obligations of each party. A seller with a short survival period and a low cap has effectively capped its post-closing exposure.

M&A litigation counsel structures the indemnification regime, negotiates the escrow amount and release schedule, and advises on the basket, cap, and survival provisions that balance the buyer's need for recourse against the seller's need for certainty about post-closing liability.

A Section 363 sale is an asset sale conducted through Chapter 11 of the United States Bankruptcy Code. It allows the debtor to sell assets free and clear of liens, claims, and encumbrances. The buyer acquires assets without the successor liability risk that attaches in a conventional asset sale. The stalking horse bidder sets the floor price and negotiates the APA subject to higher and better offers. Court approval of the sale gives the buyer a clean title that extinguishes most prior claims.

Distressed M&A counsel structures the Section 363 sale process, prepares or reviews the stalking horse APA, manages the bankruptcy court approval process, and advises bidders on the bid qualification requirements and competing bid strategy.

Due diligence in an asset sale focuses on the specific assets being acquired and the liabilities assumed. HSR Act filing clearance is required for transactions exceeding the applicable threshold. Closing cannot occur before the waiting period expires. The buyer must verify that the seller has good title to each transferred asset. Environmental due diligence identifies contamination associated with transferred real estate or equipment. A missing consent or unfulfilled closing condition can delay or kill the deal.

Corporate M&A counsel manages the due diligence process, identifies deficiencies in title or consent that must be resolved before closing, and advises on the closing condition structure that protects the buyer's right to walk away if material issues are discovered.