When a business owner decides to buy or sell certain assets, including the business itself, the most central document involved in the transaction is the Asset Purchase Agreement (commonly referred to as the "APA"). This legal document outlines and details the terms and conditions of the sale, ensuring both parties understand their rights and obligations. Below, we will explore what an APA is, why it is important, and the vital components to consider.
What is an APA?
Assets are items that are owned and have value. Business assets include property owned, such as cash, inventory, equipment, real estate, accounts receivable and goodwill. An Asset Purchase Agreement is used in business transactions to formally express in writing the understandings between two or more parties (the parties to an APA are usually the buyer and seller). An APA sets forth the respective rights, duties, and required performances of the buyer and seller relating to specific assets. As a binding agreement, an APA is an enforceable contract.
Business Assets.
A seller transfers all or part of their business through an APA. A business is comprised of many different assets. An Asset Purchase Agreement should list all of these assets and articulate those conveyed to buyer (transfered assets) and those retained by seller (excluded assets). Assets include liabilities, which are legal obligations. Often certain liabilities are retained by seller and thus excluded from transference to buyer via the APA.
Essential Features of an Asset Purchase Agreement:
Identification/Clarification of Assets: Assets to be sold may include inventory, equipment, intellectual property, contracts, and more. It is important to be precisely articulate what is included and excluded from the sale.
Purchase Price: The APA should specify the purchase price and how the parties agree it will be paid. For example, this could involve a lump sum payment owed at the time the APA is executed, ongoing installment payments, or some combination thereof. There are many different ways to structure the purchase price, such as an earn out, and all are potentially viable so long as mutually agreed upon between the buyer and seller.
Liabilities: The APA specifies which liabilities the buyer will assume (if any) and those liabilities that shall remain with seller. This is a very important aspect to negotiate. Liabilities impact the overall business and the value of the assets being purchased. Liabilities also contribute to potential risks associated with the transaction. To distinguish from stock purchases, where the buyer acquires shares of the company's stock, an APA focuses on not only the business assets themselves, but also the liabilities related to those same assets.
Representations and Warranties: The buying and selling parties make various representations and warranties about their ability to enter into the agreement and the condition of the assets. These portions of the APA provide assurances and serve as a basis for legal recourse if misrepresentations are discovered.
Covenants: These are promises, addressed within the APA, which have been agreed to by both buyer and seller. APAs frequently include non-compete clauses and also agreements to continue certain business operations. Covenants help ensure smooth transition while protecting the interest of all parties involved.
Conditions Precedent: The APA will often include conditions that must be met before the transaction can be completed, such as obtaining adequate funding as well as necessary approvals or consents.
Indemnification: This particular clause defines how the buying and selling parties will handle any claims or losses arising from the asset purchase, often including a process for resolving disputes and providing financial protection.
Why is an APA Necessary?
Clarity and Protection: An APA provides clarity on what assets are being sold, the terms of the sale, and the responsibilities of each party. This helps protects the parties by reducing ambiguity and preventing potential disputes.
Risk Management: By identifying which liabilities are assumed and which are not, an APA helps manage the risk associated with the transaction. Buyers can avoid unexpected liabilities, while sellers can limit their post-sale responsibilities.
Legal Compliance: A well-drafted APA ensures that the transaction addresses legal and regulatory requirements, including basic contractual obligations.
Financial Planning: A properly drafted APA also outlines the financial terms of the transaction, which is critical for accounting and financial planning.
Tips for Drafting or Reviewing an APA
Consult an Attorney: Whether you are the buyer or seller, retain legal counsel to review the Asset Purchase Agreement. An attorney’s expertise can help ensure your interests are protected.
Be Specific: Obtain absolute clarity regarding the assets and liabilities involved. Ambiguities may lead to future disputes and other legal ramifications.
Negotiate Terms: Don’t hesitate to negotiate terms that are favorable to your position. An APA is a negotiable contract, and terms should always be construed to better suit your needs.
Understand all Implications: Be absolutely certain how the terms of the APA will affect your business operations, financial situation, and legal standing.
Review Representations/Warranties: Ensure that all representations and warranties are accurate and comprehensive, as this helps avoid potential disputes.
Conclusion
An APA is a necessary contract for business transactions involving the sale or acquisition of assets. By providing detailed terms and conditions, it helps protect both buyers and sellers and ensures that the transaction proceeds smoothly. Whether you’re in need of drafting or reviewing an APA, attention to detail is essential for a successful outcome. Hiring an attorney to assist with understanding and effectively managing this document can make a significant difference in the success of your business transaction.
If you have any questions or need further guidance on Asset Purchase Agreements, please contact Morgan & Forb, PLLC to schedule your free initial consultation. Attorney Nathan Forb leads our Dispute Resolution practice in addition to being a business and contracts attorney. Nathan Forb can be reached via phone at (704)287-9093 or via email at Nathan@morganforb.com or by visiting our website www.morganforb.com. Licensed in North Carolina and Ohio, Nathan Forb is headquartered in Charlotte, NC. For more information on our firm's Transactions practice, please click here.
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