Most business transactions are structured as either a “stock sale” or an “asset sale.”  When a business sells its assets, the primary agreement governing the transaction is an Asset Purchase Agreement (the “APA”).  While the details contained in an APA will depend on the specifics of each business transaction, there are several key questions that will be addressed and answered in a well-drafted APA:

What is being sold?

In an asset transaction, this is one of the most crucial items in the APA.  Is the buyer buying all of the seller’s assets or a specific product/service line?  Are receivables and inventory included?  Is any real estate being transferred?  Will any assets be excluded?  Etc.  Without a clear listing of what is being sold on the front end, the deal might fall through.  Or, worse yet, the parties could close and later wind up in costly litigation.

Are any debts of the seller being assumed by the buyer?

Frequently, businesses are sold on a “debt free” basis.  If this is not the case, however, the buyer should insist that the APA include a schedule of the specific debts being assumed.  It should also be documented whether the debts assumed are in addition to the purchase price or are a partial payment toward the purchase price.  The buyer should also require indemnification from the seller if the buyer is ultimately held responsible for any of the seller’s non-scheduled debts.

What is the purchase price?

The purchase price for the assets being sold will be documented in the APA.  The APA should also allocate the purchase price among the various classes of assets being purchased so there are no inconsistencies in the parties’ IRS reporting.  When inventory and receivables are part of the transaction, the APA needs to identify whether the purchase price includes those items, or if they will be in addition to the stated purchase price.  If the latter, the APA should include rules for valuing the inventory and receivables.

There will likely be several adjustments to the stated purchase price at closing.  These could be for prorations of prepaid expenses, utilities, taxes, payroll, etc.  There may also be an escrow holdback from the closing proceeds to protect the purchaser if indemnification claims arise.

How will the purchase price be paid?

There are several ways that the buyer can pay the purchase price:  cash, bank financing, and seller financing are common.  Sometimes the parties will use a hybrid approach (such as a combination of bank financing and seller financing).  If the seller is financing all or some of the purchase price, the payment obligations should be documented, and if security for payment of the seller financing is required, the parties will need to negotiate and document the security instruments.

How will the buyer make sure that it is getting good title to the purchased assets?

The buyer will need to undergo “due diligence” to make sure it is getting exactly what it thinks it is getting.  Due diligence is simply a legal term for “kicking the tires.”  Typically, the buyer will have some time to ask questions, review financial and tax information, and learn about the business before closing.  Part of that process will likely involve completing lien searches and reviewing title documents for specific assets.

Another protection for the buyer is the seller’s agreement to indemnify for any breach of its representations and warranties.  The representations and warranties section of the APA will go through a laundry list of items that the seller is asserting to be true.  Clearly, there is some tension here – a seller is benefited by having a short list of warranties and the buyer wants as much warranted as possible.  It is not uncommon to have some back and forth to settle on the final wording of this section of the APA.

When will the transaction be closed?

The APA should also address when the transaction will be closed.  Sometimes the APA is signed well before closing; other times it is signed immediately before closing.  At the closing, there will be an exchange of many documents.  These agreements will derive from the promises contained in the APA and will vary from transaction to transaction.  They may include:  Bill of Sale, Warranty Deeds, other transfer documents, resolutions, third party and landlord consents, closing statements, noncompetition agreements, employment or consulting agreements, assignments of key contracts, lease agreements, escrow agreements, financing instruments, etc.

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