What is Asset Purchase Negotiation?
An asset purchase is the buying of assets such as inventory or equipment for a business. The purchaser will choose which liabilities they will take on from the seller, instead of purchasing the whole company entity. This can be beneficial by not assuming debts from the seller.
Governing the purchase is an Asset Purchase Agreement (APA). This document is important to outline the assets, terms, and liabilities of the transfer. It can be negotiated to ensure favorable terms.
Read the rest of this article to explore asset purchase negotiation in greater detail, how to challenge terms in asset purchase, and when to consult with a qualified lawyer for assistance with the process.
What are Key Terms in an Asset Purchase Agreement?
When reviewing an APA, you’re likely to notice some common terms. These include the following:
- Recitals. This clause informs both parties of the date when they will sign the agreement and acknowledges that they agree to the agreement.
- Purchase price. The items which are being purchased should be listed, as well as any exclusions that are not up for sale. This section of the agreement typically outlines the deal structure, asset prices, and any liabilities of the assets.
- Warranties. These are assurities the seller will give the buyer.
- Covenants. You’ll find these are used to cover any issues related to the asset purchases, such as the buyer preventing the seller from competing with them for a certain duration.
- Indemnification. To protect both parties, there will be penalties for disputes.
- Closing terms. This outlines requirements parties need to meet before they can finalize the asset purchase.
- Governance. Different states have different laws related to asset purchase agreements, so this section mentions the state or federal laws governing the agreement.
How Can You Negotiate an Asset Purchase Agreement?
It’s crucial to review your asset purchase agreement to see if there are any terms that should be changed so that they’re more favorable. Let’s look at some negotiation tips for buyers and sellers involved in an asset purchase.
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Review the Agreement
You can’t negotiate terms you don’t understand or are fully aware of. Before entering into negotiations with the other party make sure that you conduct a full review of the APA. You should hire a lawyer to conduct a thorough review so that you don’t miss any potential red flags that can increase your liabilities.
Online legal platforms such as ContractsCounsel make it easy to hire a lawyer for a flat fee contract review. All you have to do is go to the ContractsCounsel marketplace and state your project. Then, wait for bids from multiple lawyers. You can review the lawyers according to factors such as their client ratings for previous projects, location, credentials and level of experience to find the best one for your legal requirements.
Here are some things a lawyer will look out for in your agreement.
- Warranties. These should be completed in the agreement to prevent disputes. Due diligence needs to ensure that both parties have provided updated and accurate information.
- Liabilities. Check what liabilities are mentioned in the agreement, as you might agree to hidden financial burdens. Gaining clarity on this clause is essential to protect your interests.
- Compliance. The transaction needs to meet all applicable regulations and laws.
- Intellectual property rights. How IP will be transferred will clarify usage and ownership, preventing disputes.
Have a Negotiator and Observer
Negotiating asset purchases is usually a team effort. Instead of just having one negotiator to complete the task, you should include an observer. This person’s role will be to pay attention to the other party’s tactics to consider their motivations, assisting the negotiator to make effective offers and counteroffers.
What are Asset Purchase Negotiation Tips for Buyers?
Buyers need to conduct due diligence to ensure the seller’s claims are all valid and they’re not taking on any surprise liabilities. It might be the seller’s aim to transfer liabilities onto the buyer, so this is something to be aware of and challenge during negotiations.
If you want to achieve tax deductions, it can be wise to try to use the purchase price for more depreciable assets, such as equipment.
One of the biggest concerns for buyers is non-compete protection. This needs to be well-defined and fair for buyers.
Other tips include:
- Try to exclude any warranty claims or employee severance obligations. During negotiations, you could consider concessions like shorter indemnity periods.
- To maintain asset value, try to get a decent non-compete period and a transition period so that the seller can provide assistance to make the transfer smoother.
What are Asset Purchase Negotiation Tips for Sellers?
Sellers might want to fine-tune and reduce the warranty duration to avoid liability after closing. If they want to continue growing in their business, it’s a good idea to try to avoid specific assets, such as trademarks or other IP assets.
Tax is also something to consider during negotiations, as asset gains can result in higher taxes. Doing homework prior to the negotiations, such as with planning of taxes, is important to put sellers in a favorable position.
Other tips include:
- Negotiating that the buyer takes controls for additional responsibilities, such as customer deposits or service obligations. This prevents you from taking on duties for a business you don’t control.
- Make the buyer’s request for transition assistance work for you. For example, you could suggest that they are introduced to customers.
Do You Need a Lawyer for an Asset Purchase Negotiation?
Although it’s not always required, hiring a lawyer to help you during an asset purchase negotiation is invaluable. Asset purchase negotiations can be challenging to navigate without a strong legal background. They usually involve various financial and legal risks.
By having a lawyer structure your deal and clarify all risks and liabilities, you can strengthen your position during negotiations. A lawyer can also review or draft an asset purchase agreement so that it’s legally sound, fair to both parties, and with no hidden issues.
If you need to work with a qualified lawyer, hire one from the ContractsCounsel marketplace. All lawyers have been vetted on the platform and have years of experience in assisting clients with navigating asset purchase negotiations. By working with a lawyer before signing the agreement, you’ll protect your interests and minimize the risk of future disputes.
