An asset purchase agreement is a legal contract that outlines the terms of an agreement to transfer assets between parties. Selling assets is a serious endeavor that benefits from a legal agreement like an asset purchase agreement, primarily when liquidating assets, working through an estate asset sale, or closing a business partnership.
An asset purchase could include:
- A land deal or real estate investment
- Collectibles like art or jewelry
- Intellectual property such as a trademark, copyright, and patent
- An entire business like a corporation, businesses that have entered into a joint venture agreement, or an LLC
- Heavy equipment like cars, airplanes, or machinery
An asset purchase agreement is usually prefaced by a letter of intent, or bid letter, that formalizes the offer to a potential seller by presenting terms to enter into a transaction.
As with any legal document, it is best to seek the advice of a lawyer before agreeing. However, it never hurts to be prepared. With that in mind, let’s dig a little deeper into the 8 important things you should look for in an asset purchase agreement.
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1. Purchase Price & Payment
First and foremost, you want to identify the purchase price and how the payment will be structured. Asset purchase agreements generally are for significant business assets, not small items.
In this section of the agreement, the amount paid for the acquired assets is broken down, and it also includes details about how and when the purchase happens.
2. Assets Being Purchased
Even though this seems like an obvious point, you should detail all assets being purchased in this section. For instance, in a land purchase, you would need to define how large the lot is and any other items included or excluded from the deal, like buildings or parking spaces and the like.
In a former partnership agreement, you would need to list all the business equipment being transferred, down to the last chair, while service businesses being purchased as an asset would include the nature of services offered and specifics about any limitations to service.
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3. Transfer of Assets
Another key item to include in an asset purchase agreement is a description of the transfer of assets. This could include anything the seller is selling or acquired assets and any assumed liabilities.
Typically, the total assets in a business are considered acquired assets, but that does not necessarily hold for all liabilities.
This brings to the forefront another portion that should be included in this section, namely which liabilities remain with the seller and which transfer to the buyer. As such an important litigation point, this is one of those items where the advice of a professional lawyer would be advisable.
4. Closing Terms
One of the more important parts of an asset purchase agreement is the closing terms. This is when the parties formalize the purchase. This section also lists the documents that should be brought to the closing meeting. These documents include:
- Corporate resolutions showing that the seller has authority to enter into the transaction
- Employment contracts for key employees
- An executed noncompete agreement
- Certificates of good standing
For the most part, when the agreement is signed, the deal is considered closed, but that is not always the case.
5. Post-Sale Obligations
In some cases, there are post-sale obligates after the closing. For example, some agreements include Conditions to Closing or certain things that must happen for the transaction to be considered complete.
For example, post-sale obligations for the sale of a franchise may include the stipulation that the franchisor must consent to the transaction. This is common in a sign-then-close deal where the closing meeting and signature of the asset purchase agreement do not mean the deal is final.
6. Warranties
Warranties are the promises the parties make to each other by signing the agreement. They are legal representations that are associated with the purchase, so if they are later found to be unfounded, it would be grounds for legal action.
7. Covenants
The covenant section of an asset purchase agreement is one of the most diverse sections. Covenants are side agreements that can be made under the umbrella of the asset purchase agreement.
An example of a covenant could be a non-compete with the buyer for a certain period or in a defined geographic location. On the other side, the seller could agree to consult during an agreed-upon time of transition.
8. Indemnification
The indemnification section is the protection section for both buyer and seller. Indemnification outlines the damages awarded to the prevailing party of any legal dispute arising from the agreement. This could include attorneys’ fees and court costs.
When considering the asset purchase agreement cost, you should not just consider costs associated with creating the agreement. You must also consider what could be lost if you use an inexperienced lawyer.
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