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What is an asset purchase agreement?
When should I use an asset purchase agreement?
What can you buy with an asset purchase agreement?
- An entire business
- Intellectual property, such as trademarks, patents, and copyrights
- Real Estate
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How does an asset purchase work?
- Initial discussions: During this stage, the prospective buyer of a company will discuss the overall details of the business purchase
- Letter of intent: Preferably written by the buyer’s attorney, the LOI is a non-binding document that defines preliminary terms of the transaction, such as whether it will be an asset sale or stock sale, which assets are going to be involved, the tentative purchase price, and confidentiality and no shop provisions.
- Due diligence: The buyer’s attorney will review the financial, legal, and corporate documents of the target company to understand its condition and identify any underlying risks.
- Business valuation: Based on the findings from due diligence, the business is appraised by an accountant.
- Asset purchase agreement: The parties negotiate the terms of the asset agreement, including the final purchase price, financing, assumption of liabilities, representations and warranties, and indemnifications.
- Closing: The parties complete the transaction and prepare post-merger integrations
What does an asset purchase agreement include?
- Identifying details: The contract will specify the personal information of the parties that are part of the transaction.
- Definitions: This section includes the meaning of any recurring phrases or words that are used throughout the contract.
- Assets: Provides an exhaustive list of the items that are included in the transaction and also identifies those that are excluded from the sale. The contract typically includes it in an attached appendix.
- Purchase price: Defines the final price of the assets and how the payment will be provided to the seller. If the transaction includes seller financing, the APA will define the terms of the funding, such as the period, interest rates, and due date.
- Representations and Warranties: Also known as reps and warranties, these provisions serve as promises to help the buyer understand the state of the business they are acquiring.
- Covenants: Additional agreements regarding certain actions or restrictions for the buyer and the seller before or after closing the transaction, such as Non-compete Agreements.
- Indemnification: If any of the reps and warranties turn out to be untrue, the indemnification provisions will determine how the parties are entitled to compensation.
- Breach of contract provisions: The contract defines what actions would constitute a violation of the terms and the effect of such breach.
- Dispute resolution: To avoid the need for litigation, the contract will dictate a procedure to follow to resolve the differences between the parties.
- Ancillary contracts: The APA specifies what other contracts will need to be signed to complete the transaction, such as an Assumption Agreement.
- State law: Defines the jurisdiction under which the agreement will be enforced.
- Signatures: Names of the parties and the date on which the asset agreement is signed.
Whas is the difference between an asset purchase agreement and a stock purchase agreement?
Pros and Cons of an Asset Sale
- Reduced liability: With an asset purchase agreement, you will be able to limit the potential risks of the transaction associated with unknown liabilities.
- Easier process: When deciding to acquire only specific assets, the due diligence process can be shorter, as it focuses only on the assets being purchased. Similarly, the business valuation is simpler.
- Tax advantages: The cost of assets is valued at market value at the time, which brings tax advantages to the buyer.
- Renegotiate contracts: Leases or other contracts are not automatically assigned, so buyers may need to renegotiate with the landlord or other parties.
- Rehire employees: The workforce isn’t automatically rolled over unless the employees are rehired.
- Need to apply for licenses: You may need to do the application process for licenses and permits.
Who Writes an Asset Purchase Agreement?
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Asset Purchase Agreements FAQ
While an asset sale involves the acquisition of specific assets, a stock sale comprises transferring ownership of an entire business entity, including its liabilities and obligations.
Asset purchase agreements are used as part of a business acquisition or when buying an entire business. They can also be found in other transactions, such as joint ventures.
Yes, you will still to need pay taxes, but with an asset business purchase you can have better tax advantages as a buyer.