When buying a business, an asset purchase agreement (APA) is the contract under which a seller transfers some or all the company’s assets to a buyer. This legal document outlines the price, terms, conditions, and warranties of the deal.
With an asset purchase agreement (also known as an “asset transfer agreement”), the company sells only its individual assets, such as its tangible and intangible property, while the ownership of the business legal entity remains intact.
Contrary to an APA, a stock purchase agreement transfers the ownership of the entire company to the buyer through its shares or interest. This typically includes all assets, liabilities, contracts, and legal obligations associated with the company.
Entering a purchase agreement has tax and legal implications that are best addressed by an M&A attorney, who will negotiate the terms of the transaction and draft any required ancillary documents for a seamless deal.
In this post, we’ll break down the basics of asset purchase agreements and what you need to know before moving forward with the business acquisition.
In an asset sale, specific assets are sold, but the company entity remains intact.
In a stock sale, the entire company, including all assets and liabilities, is sold to a new owner.
Assets can include tangible and intangible goods, such as equipment, real estate, machinery, contracts, trademarks, and domain names.
An asset purchase agreement (APA) is a legal document that outlines the terms and conditions of a transaction between a buyer and a seller for the purchase and sale of specific assets.
These assets can either be tangible, such as equipment, inventory, and real estate, or intangible, such as trademarks, software, goodwill, and contracts.
In an asset sale, the buyer has the flexibility to choose which assets they want to purchase and which they don’t.
Typically, the assets included in an asset sale will depend on the nature of the business being sold.
To avoid misunderstandings, it is key that the APA clearly specifies the assets that are going to be part of the transaction.
Some items that may be included in an asset sale are:
If you want to benefit from the built-in brand awareness of the target business, it is a good idea to purchase any intellectual property of the company, which includes the name of the business, patents, logos, and branding, among others.
From furniture, electronics, vehicles, and machinery, an asset sale typically includes the equipment that a business requires to run its operations.
Permits and licenses, such as the ones required to sell alcoholic beverages, or transportation and logistics can be included in an asset sale.
For companies that heavily rely on their business relationships with suppliers and customers to run their operations, it’s key to include business contracts on the asset sale. In this case, an assumption agreement is required to transfer the rights and obligations of a party to the buyer.
Any building, land, or real estate that is property of the business. The assets can include the assumption of a lease agreement.
Any database that includes the clients’ or potential new clients’ personal information, such as telephone numbers, web addresses, and more.
If you plan to buy a restaurant or a business in the food and beverage industry, you surely want to know the recipes and preparation procedures that take place. This is when buying the trade secrets, recipes, and know-how of a business comes in handy.
During a merger or acquisition, it is of the utmost importance to inherit the existing workforce of the business. By transferring their employment contracts, the human capital of a business can be part of the transaction.
Goodwill refers to the value a company gets from its intangible assets, such as reputation, customer loyalty, and brand recognition.
During the transaction, the worth of a business’s goodwill is recorded when the purchase price is higher than its net tangible assets.
The purpose of an asset purchase agreement is for the buyer to specify what assets and liabilities will be acquired and to provide a clear understanding of the terms and conditions of the transaction.
An APA will determine which assets are being sold, which are excluded, how much they will be sold for, any warranties or representations made by the seller, and any other terms that need to be agreed upon.
An asset purchase agreement is typically used when a buyer wants to purchase specific assets from a seller rather than acquiring ownership in the entire company.
An APA will typically be the main agreement during a merger or acquisition, but it can also form part of other transactions.
The following are the transactions in which you may need an asset purchase agreement:
To minimize risks and have an adequate approach to the business acquisition, the M&A process to enter an asset purchase would be the following:
Once you have identified your target business, the M&A process starts by having informal discussions with the business owner about overall the terms of the transaction. The seller typically requires the buyer to sign a confidentiality agreement (NDA) to disclose some sensitive financial information. The parties also often discuss price, deal breakers, and a general timeline for the sale.
After both the buyer and the seller agree to continue with the negotiation, the potential buyer will offer a non-binding letter of intent (LOI).
It’s key to count on the legal assistance of an M&A attorney from this step since the lawyer will help you determine if it’s best to choose an asset deal or stock deal.
Also, although it is not a binding offer, the LOI will establish the price, structure, timeline, due diligence, and terms of the transaction.
The purpose of due diligence is to identify any potential risks, liabilities, or other issues that could impact the value of the target company, and to ensure that the buyer has a complete understanding of the target company’s financial, legal, and operational status. During the due diligence process, the potential buyer will conduct a thorough investigation and analysis of the target company before the acquisition takes place. This may include reviewing financial statements, contracts, leases, and other relevant documents.
Based on the findings of the due diligence process, an M&A accountant will make an appraisal of the business. Business valuations are typically done by analyzing financial statements, market trends, the value of intangible and tangible assets, and other relevant factors to estimate the worth of the company.
After analyzing the business’s assets and liabilities, and based on the valuation, an attorney will negotiate the terms of the final asset purchase agreement. The lawyer will help to define which assets to include in the sale, and the payment structure, and add the necessary provisions to mitigate underlying risks.
Completion of the necessary paperwork and any remaining conditions outlined in the purchase agreement. Transfer of the ownership of the assets and finalization of the transaction.
In an asset deal, the buyer only purchases specific assets and liabilities of the company. The transfer of ownership of certain assets needs to be confirmed with filings, such as titles to transfer real estate.
With this kind of transaction structure, the buyer will only assume liability for the assets included in the purchase agreement, for the seller will remain liable for the ones that were not sold.
In contrast, with a stock purchase agreement, the buyer purchases part or all of a company through its shares or interest. Through this method, the buyer assumes the contracts, permits, and licenses without the consent of the other party and carries on operations without interruption.
Generally speaking, small business transactions are structured as asset purchases. As a buyer, it is typically more convenient to opt for an asset deal because of the ability to claim more tax write-offs and to acquire only the desired liabilities.
Many factors interfere with choosing what kind of deal structure would work best for your business transaction. Implications related to taxes, business objectives, and risks, need to be carefully assessed along with your business attorney to make the best decision.
Some advantages of an asset purchase agreement include:
Some disadvantages of an asset purchase agreement include:
Asset purchase agreements are typically written by the buy-side’s transaction attorneys after conducting due diligence and having a business appraisal.
The elements of an asset purchase agreement differ according to the needs of the transaction, but they typically include:
The introductory section of an asset purchase agreement should include the date, names, and contact information of each of the parties, as well as the names of business officers and agents who will sign the agreement.
If the buyer is a business entity, the agreement should list the authorities that represent the corporation.
To avoid confusion and facilitate the reading of the contract, the agreement will define abbreviations or unique terms that will be used repeatedly
The asset purchase contract defines the included and excluded assets of the deal, as well as the liabilities the buyer will assume.
Since each item of the sale must be pointed out, there must be a bill of sale for each one, its description, warranties, and liabilities.
For example, if the asset is a landed property, the contract will describe items such as its exact location and as listed in the land records.
Because of its length, this section can be attached as an appendix.
Additionally, the contract will address matters related to the treatment of employees.
The agreement specifies the payment structure and related details, such as the purchase price, pay installments, price adjustment, and financing terms for the transaction.
Covenants refer to additional agreements the buyer must enter when entering the asset sale, such as non-compete agreements.
Buyers should ask the seller to include seller representations, which are fact statements, and seller warranties, which promise the veracity of the statements.
This is where the seller ensures the quality, condition, and performance of the assets that are being offered.
Warranties establish standards to be met concerning functionality or compliance. If a warranty is breached, the buyer can be entitled to remedies, such as repairs or compensation.
Includes the date of closing and the terms and conditions for concluding the transactions, such as the consent of third parties, required repairs, or financing.
The rules that dictate what actions or omissions can lead to the termination of the contract.
In the event of a breach, indemnification provisions protect the parties. This section determines how a party should compensate the counterparty when a contract default occurs when the breach is the other’s fault.
To avoid litigation and disputes, the contract may contain clauses that define the procedures to take in the event of a conflict between the parties.
These clauses include boilerplate content, such as the applicable law and other interpretation rules.
Additional contracts include:
The signatures by the authorized representatives of both parties.
Doing a business appraisal is one of the key procedures during a business acquisition, but also a difficult task that will likely cause disagreements between the buyer and the seller.
To prevent disputes, it is strongly recommended that a qualified valuator specializing in business valuations does a correct appraisal of the company.
There are several approaches to making a business valuation, which vary according to the type of assets that will form part of the deal.
The following are the methods that can be used to make a business valuation in an asset purchase agreement:
Also known as fixed assets, the quality of tangible assets can diminish over time. Business owners should record all fixed assets on their balance sheets. There are multiple ways to make a valuation of them:
Intangible assets, such as intellectual property, can be valued with the following methods:
The most common practice during a business acquisition is for the buyer’s business attorney to draft and negotiate the terms of the agreement.
It is highly recommended to involve a transactional attorney before writing the letter of intent, so the buyer can receive counseling throughout the acquisition.
During an asset sale, both parties should count on legal assistance. When counseling the buy-side of the M&A, the business acquisition lawyer will:
An asset purchase agreement is a binding contract that has multiple legal, tax, and financial implications. Always count on the professional advice of a business attorney to ensure this agreement is structured in your best interest and that it protects you from potential risks.
