Asset Purchase Agreement

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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 liabilities and assets from a company. As such, it also means that the buyer takes on the rewards and risks of the assets or business purchase.

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.

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 letter of intent lawyers 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.


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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.

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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 are only transferred, which can mitigate legal issues
  • You avoid problems with minority shareholders
  • Assets can be sold at fair market value (FMV)
  • Both parties avoid running into opportunities and instead attract serious buyers and sellers

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 buyer

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.

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