Business buyers may be presented with an asset purchase as a deal structure. They’ll soon be required to sign an asset purchase agreement (APA).
What is an APA? It is defined as a contract where the terms and conditions that govern the sale and purchase of a company or specific business assets. The asset is either bought independently or as part of an M&A deal. Learn more about asset purchase agreements in the following sections.
Key Takeaways
An asset purchase agreement (APA) defines the transfer of certain assets from a seller to a buyer. Unlike a stock purchase, which includes all assets and liabilities, an asset purchase lets buyers select what to acquire, including tangible assets and intangible ones.
The asset purchase process begins with a letter of intent (LOI), which states key terms. After both parties agree, due diligence commences and the buyer assesses value and risks of the target assets. The agreement is then drafted, reviewed, and signed. The deal closes when all conditions are met.
A well-drafted asset purchase agreement ensures clarity, covering due diligence, regulatory compliance, liabilities, and dispute resolution. It defines purchase terms, closing conditions, and post-closing obligations, protecting buyers from risks and ensuring a legally sound, secure transaction.
Business Assets Purchase Agreement
Written within business assets purchase agreement (APA) are the terms for ownership transfer of specified assets from a seller to buyer. The difference between asset purchase and stock purchase lies in the structure of the deal. In a stock purchase, the buyer acquires parts of the entire company, assets and liabilities included. In contrast, an asset purchase enables the buyer to pick and choose certain assets and liabilities to assume, offering more control over the transaction.
An asset refers to anything a company owns that holds value. In an asset acquisition, the buyer may acquire tangible assets like real estate property, machinery, vehicles, and office equipment, along with intangible assets like bank accounts, data, vendor lists, and intellectual property. of the target company.
The core components of an APA include the following:
Key parties involved in the transaction, namely the buyer and the seller.
Purchased and excluded assets
Purchase price and payment terms.
Delivery conditions
How liability assumptions are addressed
Representations and warranties
Indemnification clauses
Closing conditions
Each point will be discussed in the next section.
Key Elements of a Business Asset Purchase Agreement
Now that we’ve discussed and answered “What is an asset purchase agreement?” it’s time to define each element within the contract.
In the parties involved section, the names and contact info of both the buyer and seller, along with the business officers or agents authorized to sign the contract, are defined.
The types of assets covered in an asset purchase and sale agreement are clearly defined within the contract. Typically, the contract categorizes the asset types, while a detailed list of individual items is included in an attached appendix.
The agreement must clearly specify the purchase price, ensuring the contract is precise and unambiguous about the amount to be paid.
Delivery conditions will always be part of the contract. For example, the buyer may want to include a non-compete clause enforced for a specified period.
Buyers may agree to the liabilities assumption. They might choose to settle the company’s accounts payable to preserve strong relationships with vendors they plan to continue working with after the transaction closes.
Representations and warranties are assurances from both sides of the deal. The seller-prepared representations guarantee the accuracy of assets, liabilities, and contracts. The buyer may take it to court if any statements are found to be untrue.
Indemnification clauses protect both parties in the event of a breach, requiring the breaching party to compensate the non-breaching party.
Closing conditions include the closing date of the deal, the requirements for the deal to be sealed, and other conditions that will be enforced at the closing.
Steps in the Asset Purchase Process
Initial negotiations start with the buying party selling a letter of intent (LOI) to the selling party. Within the document are the following:
Assets the buyer intends to acquire
The price they are willing to pay
Any additional terms or conditions related to the purchase.
The due diligence phase comes after both sides have agreed to the terms of the LOI. The buyer conducts due diligence on the assets to review their condition, ownership, and any potential liabilities. Risks are identified within this process, which then helps the buyer make well-informed decisions about the deal.
After negotiations and due diligence are finalized, agreement drafting begins. The contract is tailored to the specifics of the transaction. This document details asset descriptions, warranties, representations, and covenants to establish clarity and alignment between both parties.
Both parties review and approve the agreement. Once they’re satisfied with all the terms, they sign the agreement, and all the terms and conditions are enforced.
When all transactions are final, the deal is considered closed. Asset transfers and provisions of the required documentation begin. The remaining conditions are completed at this stage.
Considerations When Drafting an APA
Clarity of key terms should be achieved during the drafting stage of the asset purchase agreement (APA). Due diligence requirements need to be explicitly outlined. The following areas are covered:
Financial records
Tax history
Outstanding liabilities
Any legal obligations tied to the business
Buyers must verify that the seller has full rights to transfer assets and that no hidden encumbrances exist.
Additionally, regulatory compliance must be addressed, particularly in industries requiring specific licenses, permits, or environmental approvals. The agreement should define purchase price terms, closing conditions, and post-closing obligations. Incorporating dispute resolution mechanisms, such as arbitration or mediation, can help mitigate legal risks and streamline conflict resolution.
The APA should also clarify how liabilities, including employee-related obligations, will be managed to prevent unexpected financial burdens for the buyer. Ensuring all terms are legally sound and properly structured enhances transaction security and minimizes post-sale complications.
FAQ
What is an asset purchase?
An asset purchase is one of two ways to purchase a company (the other being stock purchase). The buyer only acquires assets that can benefit them, while liabilities remain with the seller.
In what ways does due diligence influence the terms of an asset purchase agreement?
Due diligence helps identify risks and liabilities, which may result in modifications to the purchase price, indemnification terms, or other agreement provisions for the buyer’s protection.
Why is it important to customize an APA/asset purchase agreement instead of using a generic template?
Customizing an asset purchase agreement (APA) is necessary because every transaction is unique and involves specific legal considerations that must be individually assessed.
Generic templates often use broad language that can create grey areas, leading to confusion and potential legal loopholes. When you include detailed and precise information in each section of the APA, you and the seller can avoid misunderstandings and ensure that all terms accurately reflect the specifics of the transaction.
Ready-made forms may not address critical aspects of the deal, such as industry-specific regulations or particular liabilities, making a tailored agreement crucial for legal clarity and protection.
How do non-compete clauses benefit the buyer in an asset purchase?
Non-compete clauses restrict the seller from establishing a competing business within a defined period and location. It safeguards the buyer’s investment.
Conclusion
Summary of key points:
What is asset purchase agreement? It defines which assets are being purchased, the price of the assets and how they’ll be paid, the responsibilities of both the buyer and seller during the dealings and post-deal, how each party will deal with a contract breach, and the conditions that will be enforced for each side.
The creation of the business asset purchase agreement comes after due diligence, where buyers can perform checks on the assets they’re about to acquire. The price may be negotiated depending on the state of the asset discovered during this process. Important terms need to be clearly defined within the contract.
