Key Provisions of Asset Purchase Agreements
The Asset Purchase Agreement

When you buy the assets of a business, the definitive purchase agreement is generally known as an Asset Purchase Agreement. Here are the key points to keep in mind when drafting or negotiating an Asset Purchase Agreement:

Specific Assets Acquired: The assets of a business generally consist of inventory, fixed assets (such as equipment, furniture, and fixtures), and intangible assets (such as a trade name, customer list and goodwill, intellectual property and a lease). The assets to be acquired should be specifically set forth in the agreement. In addition, it may also be a good idea to specifically list the assets that will not be acquired. The buyer will typically want to make sure that all assets used in the business are transferred.

Price and Terms of Payment: The price for the assets should be clearly set forth. There are many possibilities for payment terms in the purchase of a business. Some of these include: full payment in cash; down payment in cash and then monthly, quarterly, or yearly installment payments; and "earn outs", which are payments based on future performance of the business. Tax considerations and the desires of the vendor and buyer play a large role as to the final terms.

Representations and Warranties (of Seller): Representations and warranties are given by a seller to give comfort to the buyer about the state of affairs of the business being sold. Some of the representations and warranties that the vendor of the assets of a business may make in the Asset Purchase Agreement are that: (1) the vendor is a corporation in good standing or some other legal entity; (2) the vendor has the authority to enter into the agreement and perform his obligations under the agreement; (3) all financial statements provided were prepared in accordance with generally accepted accounting principles and fairly represent the financial condition of the company; (4) a completely accurate list of all tangible and intangible assets to be transferred is provided; (5) the vendor has good and marketable title to all tangible and intangible assets to be transferred, free of liens and encumbrances; (6) there are no undisclosed liabilities; (7) there are no other contracts outstanding except those that have been disclosed pursuant to the agreement; and (8) the business is not in violation of any federal, state, or local laws.

Representations and Warranties (of Buyer): The buyer will generally warrant that: (1) the buyer is a company in good standing, or a private individual; (2) the buyer has the authority to enter into the agreement and perform his obligations under the agreement; and (3) the buyer has had the opportunity to inspect the assets and agrees to accept the assets, except any assets specifically excluded from the agreement.

Accounts Receivable: Determine whether accounts receivable after the date of closing will go to the buyer, or if the purchase price should be reduced to reflect that the vendor will be retaining such accounts receivable. Buyers may also ask for some representations or guarantees as to the collectability of the accounts receivable.

Assumption of Liabilities: Your agreement should address what obligations and liabilities of the business will be assumed by the buyer or paid off or kept by the vendor. The buyer will want to avoid taking any unknown liabilities.

Preservation of Business in Normal Course: This provision gives assurances to the buyer that; pending the closing of the purchase of the business, the vendor will not enter into any unusual transactions; alter its method of conducting business; or deplete the business's cash position.

Tax Issues: There are many tax consequences to buying the assets of a business. You will certainly want to address who pays for any transfer or sales taxes and who is responsible for any past income taxes of the business.

Employment-Related Issues: An Asset Purchase Agreement will likely contain several employment-related provisions, including issues dealing with retaining employees; continuation or alteration of employee benefits; collective bargaining agreement issues and termination of employees.

Corporate and Shareholder Approvals: This provision will address what types of approvals are required for the sale of the assets of a business, including approval of directors and/or shareholders; when the approvals will be obtained; and when they will be delivered to the buyer.

Conditions to Closing: The purchase agreement should address the buyer's and seller's conditions to closing of the deal. Typical closing conditions include: that all representations and warranties are true and correct; that all consents have been obtained; that all covenants have been complied with; and that various certificates, documents and legal opinions from the lawyer to the vendor have been delivered that give the buyer comfort on various legal issues.

Expenses: Unless one party has agreed to pay the other's expenses, it is a good idea to have a provision stating that each party will bear its own expenses incurred in negotiating and preparing the Asset Purchase Agreement, and in closing and carrying out the transactions contemplated within the agreement.

Continuing Services of Key Employees: This provision provides for hiring of key employees as consultants to the business once the assets have been sold. It is sometimes a good idea to do this, especially for the period of transition between the old ownership to the new. The consulting agreement is typically separate from the purchase agreement.