An Asset Purchase Agreement (APA), also referred to as an asset sale agreement or business purchase agreement, is a legal document that outlines the terms and conditions for the sale and purchase of an existing business or its assets. The APA you use should outline the details of the purchase to ensure a smooth transaction. It provides a breakdown of the following:
- Deal
- Price
- Limitations
- Warranties
An APA may be confused with a Stock Purchase Agreement (SPA). The difference is that an APA allows a company or individual to take control of another company by buying its assets, while a SPA hands over control after buying the shares.
An experienced Scottsdale business attorney specializing in contractual matters can assist you in drafting an exhaustive APA that meets the local, state, and federal laws. The APA created should protect you from issues arising after you complete the transaction. The next section will explore the elements to add to an APA and the due diligence you must perform.
Elements of an Asset Purchase Agreement
After deciding to purchase particular items from another business, you must ensure the APA you use includes certain elements that capture all the requirements. For instance, as you buy the tangible and intangible assets, are you willing to take on the liabilities for the company? If so, you must include it in your APA. The following are the elements you must consider as you create your document:
- Identifications: The APA must contain your name and the seller’s name, address, acknowledgment, and date.
- Assets for purchase: Ensure you are particular on all the saleable items. Note down everything you intend to buy, including the seat at the rear of the office or available car space. Additionally, the assets that are not on sale should be clearly stated.
- Purchase price: You should include the pricing of every item you plan to purchase and the potential liability you assume. Include details about the debt and who will take care of it.
- Payment method: How will you pay for the assets? Is it a one-time payment, or you’ll pay in installments? Include these details in this section.
- Completion of action: This part addresses the roles that the seller must fulfill to ensure the purchase doesn’t have third parties or previous issues pending. For example, vendor agreements, lease assignments, and finalizing financial matters.
- Closing terms: This element takes care of formalization. What is required to complete the purchase? Include all the terms and contingencies applicable.
- Representation and warranties: What promises are you or the seller making? Have everything in writing to enable you to have a strong legal case if the seller fails to fulfill their part.
- Indemnification: This element protects both parties in case a legal dispute arises. You should describe the financial damages you or the seller will pay in certain legal circumstances.
- Governance: This section outlines which bodies of law apply to your agreement. The APA should include which local, state, and federal laws that govern your agreement.
- Dated signatures: You may need to leave several date lines because the APA could be signed on different dates. Ensure each part has a description of the person to sign. It is not a requirement to notarize an APA.
Ensure each section contains enough details to minimize gray areas and legal loopholes. Some information, like the list of assets on sale, can be too long. You can have this as an attachment. Ready-made downloadable APAs are not the most suitable because of the unique nature of each business sale. Working with a Scottsdale business attorney ensures you get it right.
APA Due Diligence and Avoiding Contractual Pitfalls
Buying a business’s assets is a significant investment that requires a closer inspection to determine the flaws that may have been overlooked in the APA. Only after you have done your due diligence can you comfortably sign. The following table compares the due diligence you must perform and the pitfalls you will avoid.
| APA Due Diligence | How To Do It | Pitfall Avoided |
|---|---|---|
| Financial Statements Review | Go through the financial reports for the last 3–5 years | Receiving inaccurate financial status and performance of the business |
| Tax Reviews | Check tax returns for the previous 3–5 years | Hidden tax liabilities and failures in tax planning |
| Inventory Inspection | Conduct physical inspection, assess the inventory report, and perform valuation. | Acquiring unusable or unsellable inventory |
| Key Contract Review | Check licensing agreements, major suppliers, and customer contracts | Licensing restrictions and unfavorable terms |
| Employees Review | Go through HR policies, benefits, compensation, and personal files | Undisclosed employee liabilities |
| Insurance policies review | Examine the policy types, insurance certificates, and coverage details | Inadequate business coverage |
| Intellectual property review | Research on patent filing, trademark registration, and licensing agreements | Notice licensing restrictions, infringement, or ownership issues. |
Other areas you can review depending on the extent of the company you want to purchase include real estate review and environmental assessment. This will help you avoid zoning issues and environmental violations. Remember to perform a litigation search to ensure you are not taking over a business with a pending expensive lawsuit.
Need Help Buying or Selling a Business?
At Sorrell Law Firm, we understand the importance of creating a valid and exhaustive APA to safeguard your investment. We help our clients create a professional, all-rounded APA that plans for all contingincies. We also help you perform due diligence to avoid expensive pitfalls. Book your first appointment with us today.
