Asset Purchase Agreement: A Basic Guide

What Is an Asset Purchase Agreement?

An asset purchase agreement, also known as an asset sale agreement, business purchase agreement, or APA, is a written legal instrument that formalizes the purchase of a business or significant business asset. It details the structure of the deal, price, limitations, and warranties.

Due to the legal and financial implications associated with an asset purchase agreement, hire corporate lawyers to help you draft this critical document, or negotiate your deal. They will ensure that your agreement is fair and enforceable under the law.

What Is an Asset Purchase Deal?

An asset purchase is when a buyer agrees to purchase certain assets - and sometimes liabilities - from a company. While a buyer in an asset purchase is typically more focused on the assets they are buying, they can also acquire the liabilities of the business in some circumstances. Because of this, the buyer inherits the benefits and risks associated with the acquired assets or business.

Asset purchases can include the buying of:

• Licenses
• Intellectual property
• Equipment
• Machinery
• Properties
• Businesses
• And more

Upon completion of an asset purchase, the ownership is transferred from the old entity to the new one. In general, there are protocols and formalities that surround asset purchases.

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When Would You Use an Asset Purchase Agreement?

You would use an asset purchase agreement for a variety of situations. These contracts are advantageous when buyers and sellers want flexibility over the transaction. Additionally, the APA may be a component of a more significant transaction, such as a joint venture (JV) or the sale of a business entity.

How Does an Asset Purchase Work?

When a business wishes to purchase assets from another, it notifies the selling company of its intent to buy. This notification is also known as a letter of intent. A letter of intent signifies the start point of the transaction during negotiation whereby both parties agree on a price, terms, deal structure, and other details of the transaction.

The following considerations should be included in a Letter of Intent:

• Value exchanged for the asset purchase
• Anticipated timeline for negotiations and deal structuring
• Escrow account requirements if any
• Exclusivity to the buyer
• Scope of key warranties and guarantees
• Prohibited buyer and seller activities
• Termination or modification clauses
• Other pertinent details

Your letter of intent can be however long or short it needs to be and according to parties involved. However, seek out advice from a lawyer with experience in this area to help you draft this document since it carries specific legal and financial implications. They can also help you work out your asset purchase agreement’s details when the transaction moves forward.

Parts of an Asset Purchase Agreement

Whether you wish to buy or sell an existing business or its assets, you will want to govern the transaction with an asset purchase agreement. Depending upon the details of the transaction, the length of your document will vary. However, the basic structure of an asset purchase agreement is similar regardless of the specifics.

Here are parts of an asset purchase agreement that you may want to include in your document.

1. Recitals

The opening paragraph of an asset purchase agreement includes the buyer and seller’s name and address as well as the date of signing. You should also add an acknowledgment of the agreement on behalf of both parties.

2. Definitions

Identify keywords that your document will use several times and define them. For example, rather than having to describe the terms of the sale repeatedly, you can collectively refer to it as the “Sale” uniformly throughout the APA. Definitions of specific words will help avoid confusion in the future.

3. Purchase Price and Allocation

In this provision, you should describe what the seller is selling to the buyer as well as any exclusions that apply. Detail the structure of the deal, including price, payment terms, and liabilities the buyer assumes. Since this section may be lengthy, it is not uncommon to shift long lists to an attachment.

4. Closing Terms

Closing is when the transaction is formalized. The closing terms should define what is required to complete the business or business asset’s purchase or sell, including any terms and contingencies.

5. Warranties

There are promises that both parties will likely make to each other. Warranties are the representations associated with the purchase. If the seller makes unfounded guarantees, this section is critical for the buyer to pursue legal redress.

6. Covenants

Covenants are sub-agreements under the asset purchase agreement. For instance, the seller may promise to not compete with the buyer for a specific period in a geographic location. Depending upon the transaction, the covenants will vary widely.

7. Indemnification

Indemnification protects buyers and sellers in the event of a legal dispute. It describes the financial damages that one party pays to the prevailing party and under what circumstances, including attorneys’ fees, court costs, and more.

8. Governance

There are numerous bodies of law that may apply to contracts. Your asset purchase agreement should indicate which state, country, or international laws govern your contract for legality purposes or in case a dispute arises.

9. Dated Signatures

No contract is complete without dated signatures from both parties. Ensure that you leave a dateline for each signature since the asset purchase agreement could be signed on different dates. You do not need to get the document notarized.

Your asset purchase agreement will be unique to your situation. Since these transactions tend to be complicated and work in conjunction with other existing contracts, such as partnership agreements, hire transactional lawyers to assist you in this process.

Advantages and Disadvantages of an Asset Purchase Agreement

If you are considering an asset purchase agreement to formalize the sale of a business or asset, you should consider the pros and cons before deciding to use this type of document. Review the advantages and disadvantages below.

Advantages

While there are downsides to an asset purchase agreement, there are several distinct advantages, including:

• You can define how you want the transaction to be structured
• Ownership over specified assets is only transferred, which can mitigate legal issues
• You avoid problems with minority shareholders
• Assets can be sold at fair market value (FMV)

The advantages of an asset purchase agreement are critical for some businesses. Ultimately, the most significant advantage is that it provides reassurance and an understanding among the parties involved while protecting their legal rights.

Disadvantages

Although the positive aspects of an asset purchase agreement are numerous, there are a few disadvantages associated with asset purchase agreements, including:

• You will need to engage in the retitling process, which can be costly
• Employment contracts may need review and renewal
• Specific permits and licenses may not transfer to the buyer without reapplication
• Assets sold well below FMV may result in insufficient capital for the seller

The decision to use an asset purchase agreement vs. other legal instruments, such as a stock purchase agreement, should be made in conjunction with a legal professional with experience in this area. Otherwise, you could make legal mistakes that affect you later on.

Who Drafts an Asset Purchase Agreement?

Corporate lawyers are the legal professionals who are best-suited to draft an asset purchase agreement. When licensed to practice in your state, they can offer legal advice, help, and guidance with regard to making decisions, structuring agreements, and protecting your legal rights during the transaction.

Ensure that you speak with corporate lawyers as early on in the process as possible. They can do an intake of your objectives, provide recommendations, and draft all documents that are in accordance with local, state, and federal contract laws.

What Needs to Happen Before an Asset Purchase Closing?

The conditions for a transaction’s completion vary according to the terms. However, those terms typically include conditions, such as payment, approval, and any necessary changes or repairs before the sale. Determine whether you require closing price adjustments as well.

You can engage in these adjustments in response to changes in interest rates, balance sheet differences, working capital, amortization, and the value of net assets. Decide who’s in charge of taxation and how they will classify the transaction. Take care of as many of the legal and financial aspects as possible.

Asset Purchase Agreement Sample

ASSET PURCHASE AND SALES AGREEMENT

THIS AGREEMENT (the “Agreement”) is made effective this [DATE] by and between [SELLER], (the “Seller”) and [BUYER] (the “Buyer”), referred to collectively as “the Parties.”

The Parties have reached an agreement regarding the Buyer’s purchase of the [ASSET]. The Parties agree as follows:

1. Seller. [SELLER], an individual residing in [STATE] with the following address:

_______________________________

_______________________________

_______________________________

2. Buyer. [BUYER], is individual residing in [STATE] with the following address:

_______________________________

_______________________________

_______________________________

3. Purchase and Sale. Subject to the terms, covenants, and conditions contained in this Agreement, and based on the Seller’s representations and warranties contained herein, on the Closing Date (as defined below), the Seller shall sell, transfer, convey, assign, and deliver to Buyer, and the Buyer shall purchase, acquire, and accept from the Seller:

[ASSET] including, without limitation, all of the assets listed on Exhibit A attached and incorporated by reference (collectively, the “Purchased Assets”), all as the same shall exist at 12:01 A.M. on the Closing Date.

4. Consideration. The total purchase price (the “Purchase Price”) for the Purchased Assets shall be [PURCHASE PRICE]. Buyer will deliver the Purchase Price, to [ESCROW] prior to the Closing Date.

CLOSING

5. Closing. The closing (the “Closing”) within [CLOSING DAYS] days of the Effective Date of this Agreement (the “Closing Date”), or at such other time as the Parties may agree upon in writing, whereupon the documents, instruments, and other items referred to herein will be delivered by the Parties.

6. Contingency. The Buyer’s obligations to close shall be contingent upon:

1. Seller’s ability to deliver, at the Closing, clean title to the Purchased Assets and all of the documents and instruments described herein, in accordance with the terms and conditions contained herein;
2. Seller’s representations and warranties contained herein being complete, true, and accurate as of the Closing Date;
3. Satisfaction of all Due Diligence by Buyer. Such Due Diligence will include Buyer’s opportunity to review the business, properties, affairs, prospects, books, and records related to the Purchased Assets, and to obtain information that it deems relevant from the management, bankers, lawyers, accountants, and other consultants of Seller. Buyer and their representatives shall also have full access to all personnel, computers, books, and records related to the Purchased Assets, and Seller shall furnish to Buyer such financial and other data and information as is requested for the completion of the Buyer’s investigation of the Purchased Assets. In the event the transactions herein contemplated do not take place, Buyer agrees to keep confidential and not to use for any purpose any proprietary confidential information provided to Buyer by Seller, excluding any information which is otherwise known by or becomes known to Buyer outside of its due diligence investigation of the Purchased Assets, or is made public.

7. Deliveries by Buyers. Buyer shall: a. Instruct the escrow agent to disburse the funds held in escrow to Seller; and b. Such other documents, instruments, and items as shall be reasonably required to consummate the transactions contemplated herein, consistent with the terms of this Agreement.

8. Deliveries by Seller. At Closing, Seller shall deliver to Buyer the following: a. All logins, documents, instruments, and transfer paperwork necessary to transfer the Purchased Assets; and b. Such other documents, instruments, and things as shall be reasonably requested by Buyer consistent with the terms of this Agreement.

9. Migration Process. At Closing, Seller shall begin the process to transfer possession of the Assets to Buyer (the “Migration Process”). Seller shall use all commercially reasonable best efforts to complete the Migration Process as quickly as possible. From the Closing, and throughout the Migration Process, Seller shall: (a) maintain the Purchased Assets in the ordinary course, consistent with past practice, and not take any action outside of normal business practices without Buyer’s prior written consent; and (b) maintain the Purchased 3 Assets in good working condition and up-to-date (including but not limited to maintaining third-party links, marketing, advertising, and referral sources).

10. Performance of Transition Services. For a period of [MONTHS] months following the Closing, Seller agrees to provide such services as may be necessary to transition the Purchased Assets to Buyer. Such services may include, but are not be limited to (a) communicating with customers regarding the transition; (b) answering questions and queries from Buyer regarding the Purchased Assets; (c) forwarding correspondence, telephone calls, and payment, if any, received in connection with the Purchased Assets to Buyers; (d) assisting with vendors; (e) assisting with any questions concerning the Purchased Assets; and (f) such other services as reasonably requested by Buyer from time to time during the Transition Period. Consideration for such services rendered by Seller during the Transition Period is included as part of the Purchase Price.

REPRESENTATIONS AND WARRANTIES OF SELLER

As an inducement to Buyer to enter into and perform this Agreement, Seller represents and warrants to Buyer as follows:

11. Authorization. Seller has full power and authority to enter into this Agreement, all exhibits and schedules hereto, and all agreements contemplated herein (this Agreement and all such exhibits, schedules, and other agreements are collectively referred to herein as the “Acquisition Documents”) to perform his obligations hereunder and thereunder, to transfer the Purchased Assets, and to carry out the transactions contemplated. The Seller has taken all actions required by law or otherwise to authorize the performance of Seller’s obligations hereunder. This Agreement has been duly executed and delivered by Seller, and upon the execution and delivery of the remaining Acquisition Documents, the remaining Acquisition Documents will have been duly executed and delivered by Seller, and this Agreement and the other Acquisition Documents will be the legal, valid, and binding obligations of Seller enforceable according to their terms.

12. Title. Seller owns and has good and marketable title to the Purchased Assets, free and clear of all liens, encumbrances, or restrictions (e.g., restrictions on transfers or otherwise). The Acquisition Documents are sufficient to transfer to Buyer all of Seller’s right, title, and interest in and to the Purchased Assets, free and clear of any liens and encumbrances (except as expressly permitted herein).

13. Financial Records. Seller has delivered to Buyer true and complete copies of Seller’s financial records relating to the Purchased Assets and the operation of the Purchased Assets for year [YEAR] through the Effective Date; and such financial records are true and correct in all respects and fairly represent Seller’s actual revenues and expenses associated with the operation of the Purchased Assets.

14. Litigation. There are no actions, claims, proceedings, or investigations (“Actions”), including, without limitation, Actions for personal injuries, products liability, or breach of warranty arising from the operation of the Purchased Assets, whether pending or threatened against Seller or any properties or rights of Seller, or the transactions contemplated by this Agreement or any other Acquisition Document before any court, arbitrator, or administrative or governmental body. No state of facts exists or has existed that would constitute grounds for the institution of any Action against Seller or against any properties or rights of Seller or the transactions contemplated by this Agreement or any other Acquisition Document. Seller is not subject to any judgment, order, or decree entered in any lawsuit or proceeding that has materially adversely affected the transactions contemplated by this Agreement.

15. Insurance. Seller has maintained in full force and effect policies of insurance owned or held by or for the benefit of Seller related to the Purchased Assets, including general liability insurance related to the Purchased Assets (collectively, the “Insurance Policies”). All such Insurance Policies are and will remain in full force and effect through the Closing Date, and there is no notice of or basis for any modification, suspension, termination, or cancellation of any Insurance Policy.

16. Compliance with Laws. Seller has not been charged with any violation of, and is not in violation of, and is not under any investigation with respect to any charge concerning any 6 violation of, any federal, state, local, or foreign law, statute, ordinance, rule, regulation, or court or administrative order or process, or arbitrator’s award or process (collectively, “Requirements of Law”), in which such violation either singly or in the aggregate with other violations would have a material adverse effect upon the Purchased Assets. Seller is not in default with respect to any order, writ, injunction, or decree of any court, agency, or instrumentality.

17. Disclosure. Seller has disclosed to Buyer all information concerning the Purchased Assets and has not failed to disclose any information known to Seller concerning the Purchased Assets which, if known to a reasonable purchaser, would materially affect or alter the decisions of such purchaser with respect to the transactions contemplated herein. No representation or warranty by Seller in this Agreement or any of the other Acquisition Documents contains or will contain any untrue statement of any material fact, or omits or will omit to state any material fact necessary to make the statements herein or therein not misleading. There is no fact known to Seller that materially adversely affects, or that might in the future materially adversely affect, the Buyer’s use of the Purchased Assets, that has not been set forth in this Agreement or the schedules hereto.

18. Brokerage. Seller shall be solely responsible for and shall pay from funds held by www.escrow.com a “success fee” to flippa.com pursuant to the terms of a separate agreement. Seller represents and warrants that except as provided in the preceding sentence, no broker or finder has acted directly or indirectly for Seller in connection with this Agreement or the transactions contemplated.

19. Indemnification; Post-Closing Obligations.

1. The Seller shall hold harmless, indemnify, and defend the Buyer and their successors and assigns, against any and all claims, losses, damages, liabilities, and expenses (including, without limitation, settlement costs and legal, accounting, and other expenses in connection therewith) (collectively, the “Damages”) incurred by Buyer and their successors and assigns in connection with any breach of any representation, warranty, or covenant made by the Sellers.
2. The Buyer shall hold harmless, indemnify, and defend the Seller and their successors and assigns, against any and all claims, losses, damages, liabilities, and expenses (including, without limitation, settlement costs and legal, accounting, and other expenses in connection therewith) (collectively, the “Damages”) incurred by Seller and their successors and assigns in connection with any breach of any representation, warranty, or covenant made by the Buyer herein.
3. All representations, warranties, covenants, and agreements contained herein and all related rights to indemnification shall survive the Closing until the applicable statute of limitations.

20. Entire Agreement. This Agreement, together with the Exhibits, constitutes the entire agreement between Buyer and Seller with respect to the subject matter hereof and may be altered, amended, or repealed only by a duly executed written agreement.

21. Severability. If any part of this Agreement shall be held to be unenforceable for any reason, the remainder of the Agreement shall continue in full force and effect.

22. Controlling Law. This Agreement shall be governed and enforced in all respects by the laws of the State of [STATE].

IN WITNESS WHEREOF, the parties have executed this Agreement this [DATE].

SELLER: ________________

BUYER: ________________

Seek Professional Advice from a Lawyer

For large transactions, it is always recommended to seek advice from a legal professional to make sure you are protected. Corporate lawyers routinely work on Asset Purchases with their clients, and it is recommended getting in touch to discuss your project.