Every good business needs to know its contracts, especially regarding assets. You want to ensure that you get the highest value when you buy or sell assets, which can include land, vehicles or equipment. Thus, it’s good to know all of the terms and how to get the most benefit out of the written details.
What Is An Asset Purchase Agreement?
An asset purchase agreement is exactly what it sounds like: an agreement between a buyer and a seller to transfer ownership of an asset for a price. The difference between this type of contract and a merger-acquisition transaction is that the seller can decide which specific assets to sell and exclude. A merger or acquisition has to sell all of the assets involved.
When it comes to asset purchase agreements, the more information and details that are included, the better. This is because the asset purchase agreement serves multiple purposes to benefit both parties. When you have general terms, grey area ensues by which either the buyer or seller can take advantage of loopholes and terminology. You would rather avoid that.
An asset purchase agreement must accomplish several goals. First, the agreement describes the assets to be purchased. As mentioned, the specificity and exclusions matter when a business does not want to sell all of its assets. Second, the paper must set forth the terms under which the goods are transferred, laying out the rights and responsibilities of both parties.
Asset Purchase Agreement Elements
Here are the 6 most important elements that need to go into this agreement. Be sure to include all of them, whether you are the buyer or seller. You want to protect your interests at every stage of the agreement.
Who Is The Asset Purchase Agreement For?
The correct identification of the parties to the agreement is fundamental, especially with corporate entities that may have multiple independent subdivisions. It is crucial to correctly identify the entity that is entering into the agreement.
A good purchase agreement identifies the buyers and the sellers clearly. Then it specifies either the individuals or the departments involved.
What Assets Are Being Purchased?
While it may seem obvious that the thing that is being purchased should be identified, the key here is to be as specific and descriptive as possible. For land, this means providing the exact description of the lot as it is listed in the land records. This can include the acreage, buildings, and available space for parking or construction respectively.
For a business, it means a list of every piece of equipment that is included down to the two chairs in the back office. For services, it means providing details on the nature of the services and what is and is not included in those services, and much, much more. In fact, the more details, the better. They also have to match details that are on business or government records. Failure to do so can risk the deal falling through.
How Much Is It For?
Obviously, price is an essential element in the agreement, but just as important are the terms of how it will be paid. For example, if the transaction is one involving seller financing, the buyer may remit a portion of the purchase price at closing and simultaneously sign a promissory note for the remainder of the purchase price.
Debts also fall under price negotiations; if the assets are involved with loans, then the buyer and seller need to decide who owns responsibility. You have to decide if you want to pay in stock or accept the securities as such. Another option is deciding if the buyer should deliver payments in installments or all at once.
Representation and Warranties
One of the most important components that need to be in an agreement is the things that either party is relying on as part of the transaction. Most of these go in the representation and warranties section and cover such topics as warranties regarding the fitness of the product for a particular purpose, the condition or quality of the items being sold, and the legal status of the parties entering into the agreement.
A warranty is a form of indemnity in the case of the asset not meeting the agreed conditions. This usually favors the buyer, because the seller has to provide the warranty and important disclaimers. If the seller cannot guarantee the quality of the asset, then they need to protect themselves from extremely high consequences. Such consequences can include termination of the agreement, or even litigation.
What Needs To Happen Before Closing?
The conditions—or requirements—for the closing to occur can vary depending upon the transaction. Typically, however, those requirements include delivery of the purchase price, approval of the sale by whatever third parties need to be involved including government agencies, and if the seller needed to make any changes or repairs prior to sale.
Decide if you also need to do closing price adjustments. These changes may happen depending on interest, balance sheet differences, working capital, amortization – or when the asset loses value over time – and the value of net assets. Decide who will handle taxation as well, and how the transaction will be characterized regarding properties and such. Handle as many details as possible.
Miscellaneous Or “Boilerplate” Language
“Boilerplate” language may be generic or standard across contract types, but it is important nonetheless. In this section, it is important to specify which state’s laws will govern the agreement (choice of laws), that if any part of the agreement is deemed void the remainder of the agreement will remain valid, and how modifications or amendments to the agreement can be made.
Improve Your Working Capital With Trembly Law
The first and most important step towards a successful agreement is to have it negotiated and drafted by a competent and knowledgeable attorney. The attorneys at Trembly Law have helped many other businesses and individuals navigate the asset purchase process while securing and protecting their interests.
Need an Asset Purchase Agreement? Contact our office today and get the legal support and advice you need.