Asset Purchase Agreement
An asset purchase agreement (APA) s a legal document that helps two parties, a buyer and a seller, make a deal to transfer specific assets from one person or company to another. In this type of agreement, the buyer is purchasing a specific asset from a company, like machinery, real estate, trade secrets, or intellectual property, instead of buying the entire company.
Learn more about the asset purchase agreement, and at the end, you can download a free asset purchase agreement template!
When Would You Use an Asset Purchase Agreement?
You would commonly use an asset purchase agreement when you want to buy or sell certain business assets. This type of agreement is common in many industries and can be used for various reasons, like for acquisitions, estate planning, business growth, or selling a part of a business.
Who Drafts an Asset Purchase Agreement?
Usually, an attorney drafts an asset purchase agreement, and both the buyer and the seller are involved in the process. They work together to make sure the agreement meets their needs and follows the law. However for business sales or mergers, the broker may play a role in drafting the agreement during the due diligence process.
Examples of an Asset Purchase Agreement
There are many types of assets that can be part of an asset purchase agreement. Here are some examples:
- Tangible assets: Physical items like machinery, equipment, and real estate
- Intangible assets: Non-physical items like patents, copyrights, and trademarks
- Stock: Shares of a company can be part of an asset purchase agreement if they are being sold separately from the company itself
The Purpose of an Asset Purchase Agreement
The main purpose of an asset purchase agreement is to create a clear and detailed plan for transferring assets and ownership of property from the seller to the buyer. This plan helps both parties understand what will happen during the transaction and what their responsibilities are. It also helps protect the buyer and seller from future problems, like legal issues or disputes over the assets.
How Does an Asset Purchase Agreement Work?
An asset purchase is when one person or company (the buyer) wants to buy certain things, called assets, from another person or company (the seller). These assets can be physical things like buildings, equipment, or even a whole store. They can also be non-physical things like a business name, customer lists, or the right to use a special invention (called a patent).
Here’s how the process goes:
Agreement: The buyer and the seller decide which assets they want to buy and sell. They talk about the details, like how much money the buyer will pay and when they will pay it.
Legal Document: They create a special kind of contract called an asset purchase agreement. This is a written document that lists all the important information about the deal, like which assets are being sold, how much they cost, and any special rules that both sides need to follow.
Due Diligence: The buyer checks everything about the assets they want to buy. This is called “due diligence.” They might look at things like financial records, legal documents, and even visit the place where the assets are located. This helps them make sure they know exactly what they’re buying and that there are no surprises.
Closing the Deal: If everything goes well, the buyer and the seller will sign the asset purchase agreement. This is called “closing the deal.” The buyer will then pay the agreed-upon price for the assets, and the seller will give them ownership of the assets.
Transferring Ownership: After the deal is closed, the buyer and the seller need to do some paperwork to make sure the assets are legally transferred. They might need to change the names on licenses, notify customers, or update records with the government.
And that’s it! An asset purchase is a way for people and companies to buy and sell things without having to buy or sell the entire business. It can be a useful way to grow a business, sell a part of a business, or change the things a business owns.
What Should You Include in an Asset Purchase Agreement?
An asset purchase agreement should have several important parts, like:
- A list of the assets being sold
- The purchase price for the assets
- Payment terms and conditions
- Any warranties, representations, or indemnification from the seller
- Any restrictive covenants or agreements that affect the assets
Most Important Elements of an Asset Purchase Agreement
Asset Identification and Schedule: A clear and detailed description of the assets being sold is crucial. This section should include a comprehensive list of tangible assets (e.g., equipment, inventory, and real estate) and intangible assets (e.g., intellectual property, customer lists, and goodwill). It’s important to be specific about which assets are included and excluded from the sale, and any necessary changes or repairs that will be needed before the sale.
Purchase Price and Allocation: The agreement should clearly state the total purchase price for the assets and how it will be allocated among the different categories of assets. The allocation can have tax implications for both parties, so it’s essential to consult with a tax professional when determining the allocation.
Payment Terms: The agreement should outline the payment terms, including any required deposits, the timing of payments, who will pay fees, acceptable forms of payment, and whether funds will be placed in escrow. It may also cover contingencies, such as financing arrangements or required approvals, that could affect the completion of the transaction.
Representations and Warranties: Both the buyer and the seller should make specific representations and warranties about the assets and their respective businesses. These may include the seller’s authority to sell the assets, the condition and value of the assets, and the absence of undisclosed liabilities. The buyer might also warrant their ability to pay the purchase price and assume any required licenses or permits.
Indemnification: The agreement should include indemnification provisions that protect both parties from potential losses or damages arising from breaches of representations, warranties, or covenants. These provisions outline the process for making indemnification claims and any limitations on the indemnifying party’s liability. Other miscellaneous clauses should be included in this section, such as applicable law and jurisdiction, arbitration clause, and other interpretation rules.
Closing Conditions and Post-Closing Obligations: The agreement should set forth the conditions that must be met before the transaction can close, such as obtaining necessary consents or approvals, closing date, completing due diligence, and satisfying any outstanding contingencies. Additionally, the agreement should outline the post-closing obligations of both parties, such as the transfer of licenses, assignment process, ongoing customer support, or non-compete agreements.
In conclusion, a well-drafted asset purchase agreement is essential to ensure a smooth transaction and protect both the buyer and the seller. By carefully addressing these six critical elements, you can minimize potential disputes and misunderstandings and set the stage for a successful asset transfer. As always, it’s essential to consult with an experienced attorney when drafting or reviewing an asset purchase agreement to ensure that all relevant legal issues are properly addressed.
What is the Difference Between an Asset Purchase Agreement and Stock Purchase Agreement?
When it comes to purchasing a business, there are two main options: an asset purchase agreement or a stock purchase agreement (also called a share purchase agreement). The primary difference between the two is that in an asset purchase, the purchaser only acquires the assets and liabilities it identifies and agrees to acquire and assume from the seller. In a stock purchase, the buyer purchases the entire company, including all assets and liabilities.
A sale of company assets is often more advantageous for buyers as they can save time and money by not having to take on any of the seller’s liabilities. Additionally, buyers of stock will assume the tax liabilities of the seller, so buyers should ensure that sellers pay any tax liabilities before the transaction is completed.
Overall, when deciding whether to structure a business sale as an asset sale or a stock sale, it’s important to consider both parties’ needs and goals in order to make sure everyone is getting what they want out of the deal.
Who Prepares Asset Purchase Agreement: Buyer or Seller?
Both the buyer and the seller are involved in preparing an asset purchase agreement. They need to work together during negotiations and make sure the agreement is fair and meets their needs. Often, they will each have their own attorney or trusted third party to help with the process and ensure the agreement follows the law.
Free Asset Agreement
You can download this free asset purchase agreement template, but remember, an asset purchase agreement is a complicated legal document that can have a big impact on your life or your business. It’s important to get legal advice and make sure you understand everything in the agreement before you sign it.