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Understanding Asset Purchase Agreements

By Quiet Light
| Reading Time: 6 minutes

Having a clear understanding of Asset Purchase Agreements is crucial when it comes to establishing favorable deal terms when buying or selling an online business. By learning about the core elements of an APA, you’ll be in a better position to successfully navigate the acquisition process.

This article explains what an Asset Purchase Agreement is, as well as the elements found in a well-constructed agreement.

Asset Purchase Agreements

There are many different steps and components involved in the sale or purchase of a business. However, none is more crucial than the Asset Purchase Agreement. 

While this article will provide you with a clear, conceptual understanding of Asset Purchase Agreements, you should always seek professional legal counsel to ensure that your agreement is prepared and executed in a legally enforceable manner. After all, the APA is an important legal contract that governs the acquisition process.

What is an Asset Purchase Agreement?

An Asset Purchase Agreement (APA) is a contract that spells out the terms of the sale in precise detail. It is a legally binding agreement that formalizes the price, deal structure, terms, and other aspects of the transaction. All in all, it is one of the most important legal documents during the acquisition process.

Early on in the transaction process, the buyer and seller will negotiate transition terms, add-backs, final sale price, and more. Once both parties reach an agreement, it comes time to formalize the deal.

This is where Asset Purchase Agreements come into play. The Asset Purchase Agreement is also sometimes referred to as an Asset Sale Agreement.

It is important to note that an Asset Purchase Agreement is different from a Stock Purchase Agreement. An Asset Purchase Agreement allows the parties to have more flexibility in regard to which specific assets and liabilities they are purchasing when compared to a Stock Purchase Agreement. With a stock purchase agreement, someone purchases the business in its entirety.  

Creating an Asset Purchase Agreement

You can think of the Asset Purchase Agreement as the backbone of your business transaction. Due to its legal significance, it is important to work with an experienced lawyer when creating the APA. This will help ensure that it covers all agreed-upon points in a legally appropriate manner.

By spelling out the terms of the sale, an Asset Purchase Agreement serves to proactively mitigate potential disputes between the parties. This helps to create a smooth transaction process for both the buyer and the seller.

If a disagreement or dispute arises between the seller or purchaser after finalizing the deal, a well-drafted Asset Purchase Agreement clearly spells out the end resolution of the dispute. Additionally, it should also clearly state the mechanism by which to settle the dispute, whether it’s arbitration or in a court of law.

Of course, this depends on the Asset Purchase Agreement containing all of the appropriate elements for the deal at hand.

Elements in an Asset Purchase Agreement

Just as each business is unique, each business transaction has its unique elements. However, there are several key elements that most (if not all) Asset Purchase Agreements should include:

  • Introduction and recitals
  • Definitions and party names
  • Purchase price and terms
  • Buyer and seller warranty terms
  • Closing conditions
  • Termination conditions
  • Miscellaneous provisions and covenants
  • Governance and indemnification
  • Dated signatures

Let’s take a closer look at each of these elements.

Introduction and recitals

The introduction and recitals section covers a brief overview of the business and the parties involved. It also sets the stage for the deal. This section may cover the dates of the transaction, as well as the reasons for the sale.

Definitions and party names

The purpose of this section is to clearly lay out the party names in a legally acceptable way. To the untrained eye, some aspects of this part may seem tedious and redundant. However, it is important to make a clear legal definition of the parties involved. You can find similar sections on real estate purchase agreements, leases, or other legal documents.

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n addition, certain terms may be clearly defined in this section so as to streamline communication for the rest of the document. For example, the agreement may specify that the buyer and seller are jointly referred to as “parties” throughout the contract. This removes the need to continually restate the names of each individual.

This section may also define other details regarding the parties, entities, or businesses. This is to create clarity and consistency, as well as provide a solid legal foundation for the rest of the document.

Purchase price and terms

As the section title implies, this section outlines the agreed-upon purchase price, payment timeline, and payment method terms. For example, during the sale of a business, it’s not uncommon for the buyer to make a down payment at closing and for the balance to be due at a later date. The balance is sometimes paid in several installments over a specified period of time. This method is often referred to as seller financing. 

Additionally, business assets included in the sale are clearly listed. This may include tangible assets such as inventory, as well as intangible assets such as online accounts, intellectual property, deeds, and other digital assets. If there are any specific assets that are not part of the transaction, the APA may also specify these excluded assets.

Additionally, if the buyer is taking on any of the debts of the business, the APA should list these assumed liabilities. Clearly laying out each potential liability is important to avoid future disagreements between the two parties.

Buyer and seller warranty and representation terms

In this section, both the buyer and seller can make specific claims or representations of fact. Essentially, this is a legal promise that certain aspects of the deal are true. For example, the seller may make a legally binding claim regarding the nature of a relationship that they have with a supplier. Or, the seller may list potential liabilities involved with running the business.

In addition, a warranty is a legal promise made by one of the parties that they will complete some action at a specified date in the future.

Closing conditions

The Asset Purchase Agreement should also clearly spell out all steps and actions necessary to ensure the closing of the transaction. This includes due diligence terms.

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During the due diligence process, the buyer and their team comb through the business records. They do so in order to certify that all information regarding the business is true and accurate.

Termination conditions

The closing conditions specify the terms necessary for a successful transaction. Additionally, a well-drafted Asset Purchase Agreement also states the conditions necessary for one of the parties to terminate the agreement. This section specifies the steps needed in order to terminate the agreement.

Miscellaneous provisions and covenants

Many business transactions include provisions that may be unique to the involved parties. In addition, certain restrictive covenants such as a non-compete agreement or a non-solicitation agreement may fall under this category.

This section could contain a provision preventing the seller from revealing trade secrets after the sale, or provisions regarding the business’ existing contracts with suppliers. Likewise, it could include clauses pertaining to contingent liability during or after the completion of the sale.

Governance and indemnification

These sections deal with the course of action to take if a dispute arises between the buyer and seller during or after the acquisition process. For example, the agreement may list the mechanism of dispute resolution, whether it is arbitration, mediation, or litigation. It may also list the costs involved in a dispute, as well as who is responsible to bear these costs.

In addition, the agreement will also specify which laws apply to the agreement in the event of a dispute.

Dated signatures

No agreement is complete without a dated signature. Once this is complete, the agreement comes into force, and the transaction process moves forward.

It is crucial to take the time necessary to draft a thorough and legally compliant APA in order to avoid acquisition agreement issues down the road. 

Conclusion

Getting the details of your business transaction down on paper is a very important part of the entire transaction process. In addition to setting clear expectations between both parties, it will serve to prevent conflicts from arising. The Asset Purchase Agreement will also help to resolve conflicts should they arise down the road. In addition, it is crucial to have professional legal counsel assist throughout the process. 

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Whether you are the buyer or the seller, working with a trusted business advisor and an experienced lawyer will help you create an appropriate Asset Purchase Agreement. By doing so, you will set yourself up for a successful and smooth transaction.

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