Asset purchase and sale transactions may be complicated, with hundreds of pages of contracts, schedules, exhibits, and appendices. Or transactions may be relatively short, with just a few key documents. Either way, each acquisition is unique and varies in complexity based on the types of assets sold, liabilities assumed, risks each party is prepared to take, and willingness of the parties to “get the deal done.”
This article provides a roadmap for small business asset purchase agreements (“APA“) along with a high-level overview from the perspective of a buyer and a seller. These section headings are similar to the section headings you would find in a standard APA.
Assets / Liabilities
Assets and liabilities are usually listed broadly and then detailed in schedules attached to the APA. Excluded assets can also be identified depending on the circumstances of the transaction.
Buyer: The more valuable the asset category to a buyer, the more detailed the description will likely be in the APA. A buyer will want to be specific with which liabilities it will assume.
Seller: A seller does not want to inadvertently include more assets than intended by listing assets too generally in the APA.
Hint: Schedules are usually completed toward the end of the transaction, but they are too important to shortcut or skip altogether.
The purchase price is the consideration paid for the assets plus the assumption of agreed-upon liabilities. The purchase price may be paid in cash, equity, earn-outs, or a variety of other possibilities.
Buyer: A buyer may desire to make payments over time to enable offsets against unknown risks and liabilities. Earn-outs can confirm the actual value a buyer receives or can motivate a seller to stay involved in the business to help effectuate a smooth transition.
Seller: If the purchase price is paid over time (as opposed to one lump sum payment), a seller may request a promissory note and, sometimes, for an owner to sign a personal guarantee.
Hint: Allocation of the purchase price among the various types of assets and other components of the transaction (e.g. the non-compete and non-solicitation covenants) can be a hot button in negotiations due to the tax implications.
The closing of an acquisition transaction can be a “simultaneous sign and close” or a “sign and then later close.” In a sign and then later close, a buyer may continue its due diligence after signing, and there are usually pre-closing obligations the parties must meet in order to close. The simultaneous sign and close is more common in small business acquisitions.
Buyer: A buyer almost always pays at least part of the purchase price at the closing.
Seller: At the closing, a seller will usually deliver the assets and signed ancillary documents (e.g. bill of sale, and assignment and assumption), and transfer any assumed liabilities to a buyer.
Hint: As part of the APA, the parties decide whether to exchange closing deliverables in person or electronically. Some documents may still require “wet” signatures.
Representations and Warranties
Representations (or “reps” for short) and warranties serve to allocate risk between the parties and provide a basis for post-closing indemnification obligations. Reps are statements of past or present facts about the business. Warranties are promises about the future outlook of the business.
Buyer: Reps and warranties require a seller to stand behind its financial statements, disclosures, information, and commitments. They can be made by a seller, owner(s), or both (sometimes stated in legalese as “joint and several”).
Seller: A seller can negotiate the wording and narrow the scope of the reps and warranties in the APA to ensure they are accurate. Exceptions can be included in the APA, schedules (corresponding with the section number in the APA), or a disclosure letter.
Hint: Reps and warranties usually account for the largest part of the APA. A false representation or a dishonored warranty may result in claims for breach of the APA, including claims for indemnification. Representations and warranties insurance (R&W insurance) is commonly used by buyers to minimize post-closing risks (but can be expensive).
The post-closing provisions state the responsibilities of the parties after the closing, such as confidentiality, non-compete and non-solicitation covenants (e.g. of employees and customers), insurance requirements, consulting and training, indemnification, and rights of offset.
Buyer: Indemnification, holdbacks, and rights of offset are critical tools for a buyer to encourage and enforce honesty and compliance by a seller, and sometimes by an owner.
Seller: A seller may try to minimize post-closing commitments by setting minimum and maximum liability limitations, short time periods, and exclusions.
Hint: If a seller has little to no assets remaining after the closing, a buyer may request a provision that prohibits the seller from dissolving for a defined period of time in order to help a buyer avoid successor liability.
Other / Boilerplate Provisions
These provisions vary depending on the transaction, but may include important terms such as governing law and jurisdiction, severability, integration, and notices.
Buyer: A buyer may include the ability to obtain an injunction or other equitable relief in the event of a breach of obligations by a seller (e.g. disclosure of confidential information or continued use of transferred intellectual property rights).
Seller: A seller may want to ensure the boilerplate terms are balanced.
Hint: An integration clause (or “entire agreement” provision) can ensure the executed APA controls over any letter of intent (LOI), term sheet, emails, conversations, and other negotiations between the parties related to the transaction.
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Acquisitions are complex and, at times, frustrating. However, it is possible for everyone to win as long as the parties and professional advisors work in good faith toward the same end goal of closing the transaction.