Business Asset Purchase Agreement (APA): What You MUST Know!

The State of Florida is currently experiencing a massive economic boom with an unprecedented level of business deals being made every day. Many of these deals involve a business asset purchase agreement.

Depending on the assets of the business, a sale may be a rare or common occurrence for you. Either way, having an effective asset purchase agreement is an important step to protecting yourself and mitigating the risk of costly litigation. This article serves as an educational primer covering the basics of asset purchase agreements. You'll learn what they are, what goes in them, and other considerations for navigating a successful deal. 

What Is an Asset Purchase Agreement (APA)?

A business asset purchase agreement (APA) is a standard merger & acquisition contract that contains the terms for transferring an asset between parties. The terms in an APA provide key logistics about the deal (e.g., purchase price, closing date, payment, etc.) along with the rights and obligations of the parties. 

The complexity and contents of an APA can widely change depending on the purchased asset, its value, the form of payment, and the sophistication of the parties. The following assets are often the subject of APAs:

• Real estate 
• Entire businesses (e.g., limited liability companies, corporations, etc.)
• Intellectual property (trademarks, copyrights, patents)
• Commercial equipment (vehicles, airplanes, machinery, etc.)
• Valuable collectibles (art, jewelry, artifacts, etc.)

Is an Asset Sale Agreement the Same Thing?

You may see the term asset sale agreement used interchangeably with an asset purchase agreement. The labeling difference does not generally have any legal significance. However, the actual terms of an agreement might indicate otherwise depending on the context. Having a lawyer review asset sale or purchase agreements can help avoid confusion about the nature of a deal.

Additionally, you may hear the phrase “stock purchase agreement” used instead of “asset purchase agreement” when dealing with a business sale. While similar, the two serve distinctly different purposes. A stock purchase agreement is for the transfer of stock (i.e., the transfer of a certificate representing an ownership interest in a corporation – not the corporation's assets). The difference is key for regulatory purposes (i.e., securities laws) and other nuances of the transferred value.

Sample Asset Purchase Agreement Template

You can download an example asset purchase agreement as either a word or pdf document by clicking the appropriate link in this section. This example can give you a better sense of the structure and terms of an APA. 

However, a standardized form agreement cannot be substituted for an APA drafted to meet your specific transaction and is not legal advice. If you have questions about how the contents in this example APA could apply to your deal, then you should schedule a consultation with your lawyer.

What Should Be Included in an Asset Purchase Agreement?

Now that you have a sense of its overall purpose, you may have more questions about what is included in a purchase agreement of this type. While you can expect some variance among different APAs (e.g., the needs of a real estate deal are different than those of an intellectual property deal, or perhaps you need to include a non circumvention clause), the following items are standard in most APAs. 

Preamble and Recitals

These are often found at the beginning of the agreement. You can think of them like a foreword or other introductory section in a book. Their purpose is to introduce the characters (i.e., the parties) and provide important backstory and context for why the deal is happening. 

Relevant context often includes information about the nature of the parties, their business, why they're interested in the deal, the date of the agreement, and anything else that helps to frame the transaction. 

Identifying the Parties Involved

Properly identifying the parties to an agreement is essential for a host of practical, regulatory, tax, and liability reasons. Primarily, you want to have some assurance that you know who to hold responsible should an issue arise with the purchased asset. Additionally, some assets cannot be bought or sold without proper licenses (e.g., alcohol and liquor manufacturers). 

Any number of individuals, companies, corporations, trusts, government entities, nonprofits, and other organizations can be a party to an APA. The first step is to correctly input their name into the agreement as it shows on the parties' founding documents (operating agreements, articles of incorporation, bylaws, trust agreement, etc.). 

Besides the names of the parties, other identifying information is often included in the preamble. This might be the parties' dates of incorporation, entity type, location, and other details to define the party with a high level of accuracy. 

Purchase Price and Payment Terms 

The point of an APA is to sell an asset from one party to another. Naturally, the purchase price, payment method, and other terms about how the seller's asset will transfer can be found in this section. 

Purchase Price 

The purchase price of an asset will often be a total of several smaller numbers that collectively represent its fair market value. For example, you may have an amount classified as earnest money (a demonstration of good faith by the buyer). The purchase price may also consist of a deposit, escrow amount, and amount due at closing. Often, the purchase price is broken down and paid at different stages of a transaction to lessen the risk of either party terminating in the final hour of the deal. 

The purchase price is often a description of the assets being sold. In some contexts, equally important is a description of the excluded assets to avoid confusion or conflict over the consideration for the deal. 

Payment Terms

Besides answering how much and who it is payable to, the payment terms will address the when, where, and how for closing the deal. This will include the closing date and other details for how the buyer will perform its role in the deal. On the other side, this section will also provide the seller's obligations at closing (i.e., transferring the asset and any other key deliverables). Key deliverables in the closing of an asset sale might include: 

• A bill of sale 
• licenses 
• deeds or other title documents
• additional agreements required to close the deal 

Representations and Warranties of the Buyer and Seller 

The representations and warranties in an asset purchase agreement are the statements and promises of the buyer and seller that each relies on when agreeing to the deal. You may be familiar with warranties in the context of buying a house or an appliance – the same principles apply. A warrant is simply a promise to do something. For example, a seller may warrant that the asset will receive an audit or appraisal before the closing date. 

While similar to a warranty, a representation is simply a statement of fact to which a party is certifying its accuracy. The parties to an APA rely on these representations when entering the agreement. Some common representations in an asset sale include: 

• The seller holds marketable title to sell the asset 
• The seller's authority to sell the asset and the buyer's authority to buy it (often necessary in sales between business entities)
• The parties are in good standing (i.e., formally recognized as legal entities in their jurisdiction)
• The status of any lawsuits or the knowledge of lawsuits that might arise in the future involving the property
• The condition of the property 

The number of representation and warranties in an agreement can change greatly depending on the facts of the deal and the level of trust between the parties. 

Conditions to Closing and other Obligations of the Parties 

The agreement might spell out other obligations and rights of the parties. In an asset sale, the largest condition to close usually has to do with the competition of a thorough due diligence period. 

Due diligence is a legal phrase that refers to a discovery process where the buyer receives information about the asset from the seller to ensure they are getting what they paid for in the agreement. 

The scope of due diligence will also vary depending on the asset and the parties involved. To help with due diligence and closing, a stock and asset purchase agreement checklist is often a useful tool. Regardless, you might see the following in a typical due diligence period:

• An exchange of financial information (e.g., tax documents, balance sheets, income statements, accounts receivable, etc.)
• A check for any encumbrances on the asset (this usually involves a UCC search for any liens or lenders who might have a security interest in the asset)
• An appraisal, valuation, or other inspection to determine the condition of the asset and confirm its fair market value

Aside from due diligence, other obligations or conditions to closing could involve: 

• Indemnification provisions (a promise by one party to defend against or hold the other party harmless for any damages resulting from the asset or its sale). 
• Entering into additional agreements (e.g., a Florida non solicitation agreement, employment agreements, assumption agreements, promissory notes, etc.)

Termination Provisions 

A good asset purchase and sale agreement is incomplete without termination provisions. These terms provide a roadmap for the parties in case events arise that require canceling the asset sale. A termination section will identify the various reasons that would allow a party to terminate and explains the additional rights and obligations of the parties during that process. 

In most cases, termination of an asset's purchase agreement will center around nonperformance of some obligation by a party or another failed condition to close. This could be the failure to submit payment, a breach of a representation or warranty, or any other requirement under the contract. 

When a terminating event happens, the terminating party will usually have to provide proper notice (as defined in the agreement) and the parties may have to perform other obligations to unwind the deal. 

Miscellaneous Terms 

Near the end of most contracts, you will find several general terms that have more to do with enforcing and reading the agreement as opposed to its subject matter. These terms are highly important in the event of litigation or other disputes. Common terms include: 

• Conflict resolution (i.e., arbitration, mediation, or choice of venue for litigation)
• Governing law (a statement of which state law will apply to the interpretation and enforcement of the contract)
• Entire agreement clause (to prevent prior negotiations or agreements from overriding the current deal)

Exhibits, Schedules, and Ancillary Agreements

After the signature page of an APA, you will likely find a series of exhibits and schedules containing copies of agreements and other related information. Schedules often provide additional asset descriptions or the details of parties such as: 

• a list of trade names
• a list of personal property 
• customer lists, trade secrets, and other confidential information 
• income tax information 

Key Points to Keep in Mind in Purchase Agreements for Business

The provisions described in this article are meant to give you an understanding of what to expect in an asset purchase agreement Florida. An asset sale or purchase is a special event not always in the ordinary course of business. You may consider other important concepts when negotiating or thinking about the structure of a deal. 

For example, the sale of an entire business from one owner to the next should raise Florida non compete law issues. The seller of a business often has important trade secrets and information that make the business valuable, and that is why the buyer is paying a premium for it. To prevent the seller from competing or interfering with the business after closing, a non-compete and confidentiality agreement might be necessary. 

Hiring the Right Legal Representation for Florida Asset Purchase Agreements

Asset purchase agreements are often complex, time-consuming, and filled with dense legalese. Choosing a suitable legal counsel is a critical step in executing a successful asset purchase. The attorneys at Cueto Law Group take pride in their ability to consider the legal and business needs of their clients in these transactions. 

Have questions about APAs, need help reviewing legal documents, or need other business legal advice? Contact the Cueto Law Group today.