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What is an Asset Purchase Agreement and When Do I Need One?
If you are considering buying or selling a business, you may need a purchase agreement. There are two main types: (i) purchase of the entity itself (often called a stock or equity purchase agreement), which transfers everything the entity has to the buyer; or (ii) an asset purchase agreement which selects certain assets the buyer will purchase and certain obligations the purchaser will assume.
Both are contracts that specify the terms and conditions for the sale and purchase of a business or certain business assets. The APA identifies what is included in the purchase and what is excluded, the terms and conditions of the sale, the purchase price, limitations, representations and warranties, and other crucial details. APAs are commonly confused with stock purchase agreements.
Business owners who have a prospective buyer will need a comprehensive, well-drafted APA that meets local, state, and federal contract laws. The APA must also be written to protect the seller’s interests in the event that issues arise after the transaction closes. An APA should not be prepared until due diligence is performed.
Elements of an Asset Purchase Agreement
When utilizing an APA, the buyer can pick and choose which assets—and which liabilities—they would like to assume from the seller.
This differs from a stock purchase agreement, in which the buyer acquires all of the shares in a company along with all of its assets and liabilities.
An asset is anything that is owned by a company and has value. Asset purchases can include the buying of tangible assets, such as machinery, vehicles, real estate, and office equipment, as well as intangible assets such as bank accounts, data, vendor lists, and intellectual property.
The main goals of an APA are to describe the assets to be purchased, define the terms and conditions of the purchase and sale of the assets, and lay out the rights and responsibilities of the buyer and seller.
The following are some important elements to include in the agreement:
- Identification of the parties entering into the agreement
- Assets being purchased
- Assets being excluded from the sale
- The price that will be paid by the buyer to the seller for the assets
- How the assets will be paid for
- Terms of delivery of the purchased assets
- Assumption of liabilities by the buyer
- Completion of actions that the deal is dependent on (e.g., finalizing finances, vendor agreements, lease assignments)
- Closing terms, including the date of the closing, what is required to close, and any conditions imposed at the closing
- Representations and warranties of the purchaser and seller
- Indemnification (i.e., a provision that protects one party from liability if a third party is harmed in any way)
- How any disputes between the buyer and the seller will be resolved
- Dated signatures by an authorized representative of both parties
Each element of an APA should include as much detail as possible. Always use specific information over general information, since the latter can create grey areas that can lead to confusion and legal loopholes. Avoid ready-made forms and downloadable contracts. Every sale transaction is unique and contains legal considerations that must be evaluated on an individual basis.
APA Due Diligence and Avoiding Contractual Pitfalls
A deal that looks great on paper might, upon closer inspection, have flaws that cause major problems once the transaction is finalized. Only after the due diligence process has been completed can the buyer and seller feel confident about signing the APA. It is much easier (and less expensive) to identify and remedy a potential deal-breaker during the due diligence process than it is to litigate after the fact.
Assuming the seller has a buyer who is ready, willing, and able to purchase the business’s assets, the due diligence process is ready to begin. Usually, due diligence takes place following a preliminary agreement, known as a letter of intent (LOI), but before the APA is signed. Detailed due diligence is required whether it is the entire company being sold or only some assets are being transferred.
Both buyer and seller may perform a due diligence investigation. A buyer’s due diligence consists, in part, of evaluating financial records, operating records, contracts, employment agreements, leases, and other documents to make sure they are fully informed about the assets, liabilities, and financial position of the business they wish to acquire. The seller, on the other hand, wants to confirm the buyer’s financial ability to pay. The seller may also want to know the buyer’s intentions regarding continuing the business, retaining employees, and other policies.
Due diligence ensures that both parties have the information required to make an informed decision. Without due diligence, it may not be possible to arrive at a fair valuation of the business. Due diligence also ensures that neither party is caught off guard by pending claims or litigation that may impact the valuation or acquisition. Preconditions to the deal, such as clearing the seller’s debts, third-party approvals, bank approvals, and approvals from other authorities, must be identified and addressed. Failure to resolve such preconditions could hold up the deal or cause it to fall through.
Running a business and selling a business require distinct skill sets. A qualified business attorney can help to negotiate the deal, perform due diligence, and create an APA that is fair and enforceable.
Our Business Attorneys can Help With Your Asset Purchase Agreement
Schedule a meeting with one of our trusted attorneys to ensure that you are using the right document for your business purchase or sale. We will help you craft an agreement that will help you meet your needs and desires. Contact our office today to schedule a consultation.