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What Should Be Included In An Asset Purchase Agreement?

An asset purchase agreement, also known as APA, is a legal document that defines the terms of a business purchase or the acquisition of some of its specific assets.

This legal contract will describe exactly what assets are part of the transaction and address key details of the deal like price, payment conditions, warranties, and indemnities. 

When deciding whether to structure a business acquisition as an asset or purchase sale, you should consider elements such as the business objectives, transferred liabilities, and tax and legal implications of the transaction. 

Before entering an asset purchase agreement, consider hiring an M&A lawyer who will help you understand the repercussions of the deal and negotiate a contract that ensures your profit and protection. 

Key takeaways: 

  • An asset purchase agreement allows greater flexibility for business buyers since they can cherry-pick the desired assets they want to buy and exclude unwanted liabilities. 
  • With an asset purchase agreement, a buyer can acquire the tangible assets of a business, such as machinery, inventory, and equipment, and intangible assets, such as intellectual property.  
  • While an APA only transfers certain business assets, a stock purchase agreement transfers the shares of a company, which means the business ownership, along with its assets, rights, and liabilities. 

What Is Essential In An Asset Purchase Agreement? 

An APA is typically written by the buyer’s business attorney after conducting due diligence. 

Once aware of the business appraisal and its potential risks, the attorney will have the tools to draft an asset purchase agreement that includes the desired assets, excludes unfavorable liabilities, and minimizes the impact of circumstances that endanger the success of the transaction.

The elements of an asset purchase agreement vary according to the needs of the transaction, but an effective contract would contain the following:

Party Information

Who is part of the transaction?

The APA identifies the buyer and seller of the business or their authorized representatives, as well as their contact information. 

Definitions

What do the terms in the contract mean?

To facilitate its reading, the legal document will use abbreviations or special terms to express specific terms of the deal. 

Purchased Assets

What business assets are being transferred?

This section describes each of the physical and intangible assets that are included in the transaction. Each item must have a detailed description, such as its location and area (in the case of real estate). 

  • List and description of the included items and liabilities
  • Excluded items and liabilities

Because of the extension of this section, this information is included in separate exhibits. 

Purchase Price

How much are the business assets being sold for and how are they going to be paid? 

The contract will specify:

  • The total purchase price
  • Payment conditions and timeline of the transaction
  • Financing conditions
  • A holdback, if the parties agree to one

Representations And Warranties

What do the parties promise about the involved assets or other circumstances in the transaction?

As proof of what the buyer is offering, the contract must include representations, which are statements of fact about the current state of the assets. Additionally, this section must include warranties or promises about the condition or performance of those assets. 

These provisions outline statements regarding the business’s condition, financials, legal compliance, and other relevant matters. 

With these provisions, both parties assure the truthfulness and conditions of certain facts while remaining protected if these assurances are false or misleading.

Requirements For Closing 

What needs to happen to close on the business?

The APA describes the events that need to be fulfilled to close the transaction. This includes things like:

  • Obtaining necessary approvals
  • Any required repairs made by the seller
  • Assistance with the transition

Covenants

What additional obligations and restrictions are included?

These provisions specify additional agreements for each of the parties to fulfill. This can include:

  • Non-disclosure agreements
  • Non-compete agreements
  • Promises from the seller to make the best effort to transfer property

Indemnification 

How is a party going to compensate the other in case of a violation of the agreement?

These provisions determine the obligations of each of the parties in the event of certain losses or damages.

They include

  • The specific damages or liabilities that are covered by the provision
  • The party responsible for providing indemnification and the one entitled to receive it
  • Procedures and timelines for notifying the indemnifying party

Dispute Resolution

How do we solve problems, in case they arise? 

Outlines the process for resolving disputes, such as through negotiation, mediation, or arbitration.

Asset purchase agreements play a crucial role in facilitating the transfer of business assets and ensuring a smooth transaction. However, due to the complex nature of such agreements, it is highly advisable to involve a qualified lawyer throughout the process.

A lawyer can help identify potential risks, negotiate favorable terms, and ensure compliance with relevant laws and regulations. By involving a lawyer, you can minimize the chances of costly mistakes, disputes, or legal complications down the line.

From conducting due diligence to drafting and reviewing the agreement, a lawyer’s guidance will provide peace of mind and contribute to a successful transaction.

Remember, every business acquisition is unique, and the specific details of an asset purchase agreement can significantly impact the outcome. Therefore, it is essential to consult with a knowledgeable lawyer who can tailor the agreement to your specific needs and ensure a fair and legally sound transaction.