Asset Purchase Agreements: 17 Things 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 asset purchase agreements.

An asset purchase agreement is an agreement between a buyer and a seller to transfer an asset’s ownership for a price. The more information and specific details included, the better, as the agreement is meant to serve both the buying and selling parties. Gray areas open up the possibility for either party to exploit loopholes and terminology to gain an unfair advantage.

A number of critical provisions need to be included in every asset purchase agreement for clarity and to ensure that no gray areas exist within the document. These crucial contract provisions are listed below, along with some important points to keep in mind concerning asset purchase agreements and the transfer of business assets.

Key Provisions in Most Asset Purchase Agreements

The following provisions are commonly included in all types of asset purchase agreements (APAs). Some provisions listed may not be necessary for all agreements, but the majority are often present in APA contracts, and you should be aware of them as a savvy businessperson.

Generally speaking, the more illuminating and explicit the details included in an asset purchase agreement, the better. Going into great detail what the deal encompasses in its various facets works to eradicate any gray areas or potential for confusion with either party.

Preamble and Recitals

The introduction, or preamble, to the asset purchase agreement is the first paragraph of the document. The parties involved in the contract are introduced, and the agreement is named with an effective date of the contract.

Following the preamble, there is generally a series of statements containing the legalese “WHEREAS.” This section mainly lays out the transacting parties’ intentions with the contract to provide context to anyone who may later interpret the agreement.

Identifying the Parties Involved

It’s imperative that the correct parties are identified explicitly within the agreement. This is especially crucial in agreements between large corporate entities with many independent subdivisions and subsidiaries.

Clear, accurate identification of the buyers and sellers is a crucial, fundamental part of any good APA. The correct legal name of each business entity involved in the asset sale must be verified.

Article 1 Definitions

The first section of the asset purchase agreement is often the definitions section. This sets forth what specific terms will mean throughout the document to standardize the vocabulary used, for the sake of clarity. These terms define the contract and help clarify which party is and is not getting what in the agreement.

This section may contain any definition or cross-reference relevant to the document.

What Is Being Purchased?

Article 2 contains the specific details of the transaction, including a detailed description of the thing or things that are being purchased such as real estate, real property, equipment, fixtures, licenses, intellectual property, trade secrets and stock. It’s best to be as descriptive and explicit as possible in this description.

The second section of the business asset purchase agreement may contain language relating to excluded assets to be retained by the seller, assumed liabilities that are to be taken on by the buying party, and excluded liabilities that are to remain the property of the seller.

The type of description required for what is being purchased varies slightly by the type of property being transferred. For APAs concerning the selling and buying of land, this should be a complete description of the lot or lots as listed in land records with information such as acreage, number of buildings, parking access, and construction areas.

An APA for a business should describe each piece of equipment (each business asset) included in the sale. Services must include descriptions and details concerning the nature of what is and isn’t included in those services. These details must also match the details on business and official government records.

Purchase Price

How much does the business asset cost, all in all? Will the buyer assume certain debts of the seller, and is that included in the purchase price? It’s necessary to specify the exact value being exchanged between parties.

Earn-Out

An earn-out is the practice of a seller receiving a portion of the purchase price following closing based on the business’s continued performance. This particular provision is often the subject of litigation following a deal, as both parties can be motivated to vie for an advantage over the other.

Purchase Price Holdback

This is another area of the contract that is frequently the subject of post-closing litigation. Purchase price holdback is a portion of the purchase price that is not paid at the closing date and is usually held in a third-party escrow account. This holdback is mainly implemented to protect the buyer, and escrow money is generally maintained until certain conditions are met.

Due to the nature of a holdback provision, it’s imperative that this section’s terms are carefully negotiated and clearly understood by each party. Even the best-written holdback provision can have its day in court when one party is unhappy with the other.

Payment

It’s important to have language within an asset purchase agreement describing how payment will be made. Will it be a large lump cash sum, right to receivables or will some portion be completed with a promissory note or stock purchase? Often the seller will allow a certain percentage of the purchase price to be paid out over time. This payment plan or any other agreement for a payment method should be included in a well-written ADA.

Closing Price Adjustments

It’s often the case at closing that the purchase price needs to be adjusted based on the business’s performance. The closing purchase price can be adjusted for working capital, net assets, trailing revenues, and more. 

Taxation

Both parties should be interested in favorably characterizing the agreement’s terms for taxation purposes and minimizing taxable capital. The purchase price allocation dictates the portion of the purchase price that the seller is legally allowed to treat as capital gains, applying a favorable tax rate.

Employee Issues

The question of what happens to all the employees when ownership of a business changes hands is an essential part of the APA negotiating process. Does the buyer want to take on all the existing employees and try to ease the transition as smoothly as possible? Or are they planning to either bring with them or hire their own employees who have no previous relationship with the seller’s organization? You will need to review existing employment agreements to help sort out these issues.

If there is to be a post-closing mass layoff for a business with 100 or more employees, the employees must be apprised of this — as per the Worker Adjustment and Retraining Notification Act, which includes protections for workers such as a 60-day notice. The seller would also need to specify how they plan to address employment contracts including employee salary benefits and severance pay in the APA.

Should the buyer choose to retain most or all of the employees post-closing, they must include in the APA all the necessary information relating to their employment agreements including employees’ salaries, benefits packages, and retirement plans.

Noncompete Agreements

Depending on the type of business assets being sold, the buyer may choose to obtain a noncompetition agreement from the seller and key members of the seller’s business team.

The buyer may choose to implement a noncompete agreement  in the asset sale if former members of the seller’s team or the seller might feasibly take advantage of their knowledge and experience to open a new business in direct competition to the business assets sold in the APA. In this case, a noncompete agreement is included to ensure the continued enterprise value of the business assets being sold. In Florida, noncompete agreements must be limited to a specified period of time and within a specific geographical range. Importantly, Florida law mandates that these limitations must be “reasonable” to protect a “legitimate business interest.”

Indemnification Provisions

Indemnification provisions are inclusions to the APA that essentially protect either party from each other should any breach of the agreement occur post-closing.

Third-Party Approvals

There are likely contracts, leases, and other existing business agreements held by the selling party that will need to be addressed early on in the negotiation process. These agreements will need to be re-signed and agreed upon between the buyer and each participating entity.

It is recommended that the process of acquiring third-party approvals is begun early in the asset purchase negotiation, as it can be a lengthy process with long lead times.

Fees

Unless otherwise agreed upon, generally speaking, each party bears the total cost of their attorneys’ fees and accounting fees associated with an asset purchase agreement. In some instances, it may be agreed that one party or the other is to bear the total amount of fees — typically the buyer when this occurs.

Other commonly accrued fees in the APA process include fees billed for consultants, brokers, appraisers, and other necessary goods or services related to the negotiation process.

Due Diligence

Due diligence refers to the process of checking off boxes, so to speak, before finalizing and closing a deal, which a savvy businessperson should do before closing any business agreement. This is an integral part of the process, as it gives each party time to search for any irregularities, mistakes or encumbrances in the APA and ensure they are making the decision they want to make.

A time frame for due diligence completion should be agreed upon between parties. No one wants the process to drag on for an eternity, and maintaining the momentum of closing a deal generally works out more favorably for each party involved. Warranties  and certificates of good standing (if applicable) from both parties should be included in the APA.

Boilerplate Language

There is generally dense legalese throughout legal documents that’s often difficult to understand without context or even with context. Much of this “boilerplate language” seems generic and standardized across various contract types and frequently can be misconstrued as unimportant “fluff” that doesn’t add much to the document. 

Though boilerplate clauses may seem like trivial legal fluff jargon, they’re included in nearly every business contract, or contract of any type, as a way to protect the interests of all parties who sign the agreement.

Warranties are often written in boilerplate language that leaves no room for “creative interpretation.”

Key Points to Keep in Mind

The provisions described in this article are meant to give you an understanding of what to expect in an asset purchase agreement and are not meant to serve as legal advice. A number of factors can influence the structure of an APA.

Unlike a bill of sale, Asset purchase agreements are generally quite lengthy, detailed documents, particularly for large corporate mergers and acquisitions with hundreds of pages of provisions. Each party may go back and forth “red-lining” sections, sentences, or specific terms used in the APA, which can become a lengthy process.

APAs made between two private parties — such as in the case of a lot of land between two neighboring houses, being sold by one party and purchased by the other — may not require an overly long document. The main provisions and necessary components of a typical APA should be included. It’s advisable for each party to do their due diligence to ensure a satisfactory closing for both parties.

Hiring the Right Legal Representation

Asset purchase agreements are often complex, time-consuming, and filled with dense legalese. Choosing suitable legal counsel to represent you or your business regarding an APA is an important decision.

Cueto Law Group is a business law firm based in Coral Gables, Florida, primarily providing business law services to small and medium-sized businesses. Our business attorneys specialize in contract review and drafting along with business litigation. Our experts are well-versed and knowledgeable in breach of contract, partnership disputes, intellectual property theft, and noncompete agreements.

‌Contact Cueto Law Group for a consultation or to learn more about the business legal services offered. Asset purchase agreements and other business law can be tricky business. Make sure you’ve got the right legal representation on your team going into your APA.

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Cueto Law Group, P.L.

Based out of Miami, Cueto Law Group offers an extensive range of legal and business counsel to individuals, entrepreneurs, and corporations.

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