The Business Assets – How to Buy a Residential Assisted Living
An asset purchase agreement for the purchase of a residential assisted living business needs to include several important elements. Some of these elements have been described in blogs on the first paragraph, the background section, the agreement’s section, and a blog on the typical contingencies you might find in the real estate contract that being executed concurrent to the asset purchase agreement.
Although there is more to write about in the agreement’s section, I promised to discuss the business assets in more detail.
The urgency to meet the demands of the lender and closing agents can overshadow the reality that a business sale is underway, which involves numerous specific components that must be clearly identified. This portion of the asset purchase agreement may be the most important of the entire agreement.
What are “Business Assets?”
Business assets are the tangible and intangible items that a business owns or uses to operate and generate income.
Tangible and intangible items are two categories of business assets. Tangible items are those that have a material existence and can be seen, touched, or measured. Examples of tangible items are furniture, fixtures, equipment, inventory, licenses, permits, contracts, HR files, resident records, customer lists, goodwill, trademarks, domain names, and trade secrets.
Intangible items are those that have no physical substance but have value based on their intellectual or creative content. Examples of intangible items are licenses, permits, contracts, customer lists, goodwill, trademarks, telephone numbers, domain names, and trade secrets.
In relation to a business purchase, tangible and intangible items may have different implications for the buyer and seller in terms of tax, depreciation, amortization, and valuation. For instance, tangible items are generally subject to sales tax and can be depreciated over time, while intangible items are usually exempt from sales tax and can be amortized over their useful life. Additionally, tangible items may be easier to appraise and verify than intangible items, which may require more due diligence and negotiation to determine their fair market value and transferability.
They include, but are not limited to, furniture, fixtures, equipment, inventory, licenses, permits, contracts, customer lists, goodwill, trademarks, domain names, and trade secrets. In an asset purchase agreement, the buyer and seller should specify which business assets are included in the sale and how they are valued and transferred.
What is not included in the term “Business Assets?”
For example, cash and cash equivalents, bank accounts, securities, accounts receivable, loans, and other financial instruments may not be considered business assets, as they are not directly related to the core activities or value proposition of the business – unless they are included in the list of business assets.
Similarly, real estate property, vehicles, personal belongings, and other non-business-related assets may not be included in the term "business assets", unless they are specifically used for the business purposes and agreed upon by the buyer and seller. Therefore, it is important to carefully review the asset purchase agreement and the schedules attached to it to identify what is and what is not included in the term "business assets".
Many buyers prefer using an asset purchase agreement when acquiring a business to bypass inheriting its liabilities. It's crucial to clearly delineate which liabilities are being assumed by the buyer and which are not. Buyers typically aim to exclude certain liabilities, such as:
- Pre-existing tax liabilities owed to the government.
- Legal liabilities from actions taken before acquiring the business.
- Employee vacation pay accruals.
- Specific outstanding debts.
Some sellers want to exclude such things as COSTCO membership or other small credit lines. This is a matter of discussion between buyer and seller.
The asset purchase agreement should explicitly list any obligations to be excluded from the sale. It may also be structured to absolve the buyer of any liabilities or obligations not specifically mentioned in the agreement.
The Simple Part – The Inventory
The "agreement" section of the asset purchase agreement typically addresses many of the previously mentioned issues. However, asset purchase agreements also typically include an inventory as part of a "Schedule" or "Exhibit." This inventory not only reiterates the general categories of tangible and intangible assets being transferred but also provides a comprehensive list detailing the specific items located in various parts of the property, such as each room, the garage, storage spaces, and any items situated outside the building or at off-site locations.
To assist our clients in preparing for the business acquisition, we offer an inventory template.
The clear identification of assets, and liabilities to be transferred is a primary purpose function of an asset purchase agreement and stands as a crucial element of the transaction. This clarity is essential to precisely outline the assets and responsibilities that are to be transferred from the seller to the buyer.
The information herein is intended to be educational and an introduction to the subject matter presented. It is NOT specific legal advice to be relied upon for specific individual circumstances. Contact your own legal professional or reach out to our firm if you would like specific advice on this topic.
Look for additional blog posts on topics of interest to Assisted Living and Behavioral Health operators. We welcome topic suggestions! Write to info@pinkowskilaw.com if you are curious to learn more about a certain topic impacting assisted living or other group housing concerns.