An asset purchase agreement (APA) is a legal document that regulates transactions involving the sale and transfer of business assets. The business assets could include tangible assets, like real estate or supplies, or intangible assets, like accounts payable or a customer database.

Details of an Asset Purchase Agreement

An APA addresses a range of issues and can be extremely detailed and complex. Each APA is specific to the unique transaction. Below are the major categories that are typically detailed in an APA.

  1. Definitions

The biggest issue in an APA is precisely what is being bought and sold. Therefore, every APA should clearly define all assets and liabilities that are being purchased. Being highly detailed in the definitions can help eliminate potential disputes over what is being bought and sold.

  1. Terms of the Sale and Structure of the Purchase Price

An APA should detail the terms of the sale, including the structure of the purchase price. Obviously, the grand total of the purchase price must be stated, but also any holdback amounts and purchase price adjustments should be discussed.

A holdback amount is when a certain amount of the purchase price is held back by the buyer or put into escrow for a period of time after closing. It is used for any post-closing issues that may arise and is usually paid out to the seller after a certain period.

Purchase price adjustments reflect changes in the value of the asset from negotiation to closing. Some examples of common purchase price adjustments that may be included in an APA include adjustments for closing current assets amounts, closing current liabilities amounts, and the closing net working capital amount.

  1. Representations and Warranties

Parties generally include a section of representations and warranties in an APA to help minimize risk. Representation and warranties are statements of fact relating to the business, assets, liabilities, properties, conditions, operating results, operations, and prospects of the acquired assets.

Some examples of subjects commonly addressed in the representation and warranties section include authority and enforceability, legal compliance, accurate financial statements, and a lack of litigation, liens, and encumbrances. There also may be industry-specific representations and warranties.

There are usually reciprocal representations from the buyer to the seller. If the buyer is paying cash, they will be limited but could address subjects like the absence of conflicts, financing, brokers and finders fees, and authority and enforceability.

  1. Covenants

A covenant is a promise to do or refrain from doing something. The covenant section in an APA typically requires the seller to take general or specific action in the gap period between signing and closing. Some common examples of covenants include requiring the seller to continue to run the business in the ordinary course of operation consistent with past practices, maintain inventory at the usual levels, and use reasonable efforts to maintain customer, vendor, and employee relationships.

An APA usually has a covenant requiring the seller to notify the buyer of certain material developments impacting the transaction and requiring parties to take actions needed to complete the transaction, like securing third party consents and obtaining regulatory approvals.

Negative covenants prevent a party from taking a specific action like incurring debt up to a certain amount and making significant capital expenditures.

  1. Closing Conditions

Closing conditions are conditions that must be satisfied or waived before each party is required to complete the transaction. It is generally required that each party’s representations and warranties were true at the time they were made and at the time of closing and that each party complied with any covenants.

  1. Indemnifications

The indemnification section in an APA provides that each party is entitled to compensation for any losses suffered as a result of a breach of any of the other party’s representations, warranties, and covenants. Parties can add indemnities for other specific causes.

  1. Termination

An APA generally contains a right to terminate the agreement and transaction if any of the closing conditions are not satisfied or waived. An APA also typically allows termination by mutual consent, termination by the buyer if the acquired business suffered a material adverse effect, termination by either party if there was a failure to obtain necessary governmental or third party consents, and termination if the deal does not close by a specific deadline.

Your Phoenix Business Planning Attorney

If you have questions about asset purchase agreements, you should contact a business planning attorney. Nicole Pavlik is an experienced business planning attorney based in Phoenix, Arizona. Call Nicole Pavlik Law Firm today at 602-635-6176 to schedule a free consultation and discuss your business planning needs.