When a company buys another business, there are two primary methods: buying the company as a whole by becoming sole or majority shareholder or buying the assets held within the company. An asset purchase agreement allows a company to take possession of all the tangible and intangible assets and property owned by the business being acquired without becoming owners of the company itself. An asset purchase agreement allows a buyer to leave the seller intact as a separate legal entity but to purchase any desired value within.
If you are considering an M&A transaction using an asset purchase agreement, it can be a complex legal process, so it's important to involve a lawyer early in your negotiations or even before for drafting a Letter of Intent for an APA. This letter is a non-binding document outlining the general terms and price by which a buyer proposes to purchase the assets of a particular business. If signed by the seller, it indicates that both parties intend to move forward in completing the transaction. A free template of a Letter of Intent for an Asset Purchase Agreement can be found in our Legal Document and Form Learning Center.
Understanding Asset Purchase Agreements
Asset purchase agreements are a flexible instrument used by companies to take possession of key assets of other businesses.
Definition of APA
An asset purchase agreement (APA) is a contract used to purchase company assets, such as intellectual property, machinery, property, customer lists, contracts, etc. When you use an APA, you do not have to purchase all company assets. In fact, commonly only certain assets are included in the sale.
In the Context of M&A
An APA is a common way to take control of the major assets and value of another company without being forced to take the company as a whole. Essentially an asset purchase agreement allows a business to carry out an M&A transaction without being forced to take on all liabilities of the target company. In addition, APAs allow a company to be selective in which assets are a value-add, thereby taking only the ones most needed and avoiding duplications.
Key Terms and Provisions in Asset Purchase Agreements
An asset purchase agreement is in many ways similar to other contracts the complete mergers and acquisitions or purchases, but there are some distinctions. The following are some of the key terms and provisions found in APAs.
- Bills of Sale. Because the titles of individual assets are being turned over, there must be a unique bill of sale for each one.
- Schedule of Purchased Assets. An APA has a detailed schedule of all purchased assets, including descriptions, condition, warranties and limitations, and any liens or other liabilities.
- Assignment and Assumption Agreements. These are the contracts by which contracts and permits are turned over to the buyer, including documentation confirming necessary approvals.
- Property Transfer Documents. The seller must write out individual transfer documents for tangible property.
- Transfers of Title. Each actual title must be formally transferred over to the buyer.
- Purchase Price. The purchase price must be specified, as well as any contingencies that would change it (such as the exclusion of a specific asset from the sale), payment plans and method of payment.
- Representations and Warranties. All representations and warranties are a vital part of an APA. This is how assurances as the the quality and condition of assets are made. In particular, APAs include warranties to ensure compliance with any bulk transfer and fraudulent conveyance rules in the event that the seller becomes insolvent, as well as representations that the assets being acquired are sufficient for the acquiror to operate the acquired business after closing.
- Covenants. During the gap period between signing and closing, the seller will continue to operate the business and govern the assets to be purchased. Covenants ensure that the same level of care is maintained during this time. In addition, these provisions deal with obtaining any needed consents, transfer of information about the business, and any other actions that could affect the deal.
- Closing Conditions. Usually, there are conditions that must be satisfied or waived before the deal can be closed. This section of an APA details exactly what they are.
- Indemnification. These provisions allow the buyer to be compensated by the seller (and vice versa) for any misrepresentations or breaches.
- Assumed Liabilities. Under these provisions, the buyer establishes which liabilities will be assumed through the purchase. In an APA, this is usually very limited, as one of the main goals is typically to limit liability.
What’s the difference between an APA and an SPA and which is better?
A company that completes an asset purchase agreement only purchases specific tangible assets, while a company that completes a share purchase agreement buys a majority (or all) of the shares of a company, thereby taking ownership of all the assets, contracts, and business operations of the business.
Both APAs and SPAs have their individual advantages and disadvantages. For example, SPAs enable a company to ensure that all contracts with suppliers, clients, and other third parties remain intact. It also enables the company to carry on operations without interruption. An APA, on the other hand, allows the company to pick and choose the most desirable assets and leave behind any liabilities, although not all contracts can always be reassigned. Ultimately, neither contract is “better,” you simply must decide which fits your needs better for each unique business situation. Talking over the transaction with an M&A lawyer may help give you better clarity.
You can also download a free template of a term sheet that can be adapted for situations involving an asset purchase from Priori's Document & Form Learning Center.