An Asset Purchase Agreement is a contract between a buyer and seller whereby the seller accepts to transfer an asset they own at an agreed price.
Such an agreement describes the type of assets a buyer should acquire and the terms and conditions governing the asset acquisition. Note that before you sign a contract as a buyer, it should provide in-depth details on the transfer of ownership and price of an asset. This is important as it ensures that you don’t face any difficulties once the agreement is finalized.
Some of the assets that are transferrable in an asset purchase agreement include:
- Plant and machinery
- Stock and bonds
- Real estate (investment or residential)
- Household furnishings
- Personal property
- Precious metals (silver, gold, etc.)
An Asset Purchase Agreement Addresses the Following
There are a few things that an asset purchase agreement addresses.
An asset purchase agreement usually addresses the following things:
Goodwill is the amount a buyer pays for particular assets at a competitive price. Such assets are supposed to ensure that a business attracts new clients and remains competitive. Goodwill is usually included in the asset purchase agreement under the asset category for accounting.
Employees and TUPE
If you plan to buy the shares or assets of a company, be informed of their position concerning employees. When purchasing shares, the employees will continue working for the firm. The only thing that changes is the ownership of the shares. When purchasing a company’s asset, especially where you’ll need to transfer goodwill, property, or contracts, employees are subject to TUPE (Transfer of Undertakings, Protection of Employment).
This means that when you acquire such as a business, you’ll be responsible for managing employees. Remember that you’ll have to consult employees on such a move, and they have to agree before you can affect such a transfer.
This is documentation where a buyer agrees to acquire a business based on an agreement outlined in the transfer document. Most buyers use a novation agreement to ensure that the parties involved agree to the effected changes.
VAT applies to any buyer who wishes to purchase certain company assets. The only time there can be changes is when you’re transferring a business as a going concern. So, if your transaction meets the Transfer of going concern requirements, you’ll not have to pay VAT when acquiring your assets.
Before completing the purchase of a company or business, you’ll need to get the total value of the stock they have, if any, as this will determine the final price to pay.
Must Have Elements of An Asset Purchase Agreement
There are a few essential elements involved in writing an asset purchase agreement.
Here’s a brief overview of the components and instructions necessary for writing an asset purchase agreement:
The date in an asset purchase agreement indicates the day that a buyer obtained control over the assets of a business. The date you acquire the assets of a business is also when such assets are valued for tax and accounting purposes. You can date your agreement by indicating the month two-digit day of the month and year on the blank space provided before the statement “Between the following parties” under the date section.
Proper identification of the parties involved in an asset purchase agreement is crucial. This is the case when acquiring a corporate entity with different independent subdivisions. A good purchase agreement should clearly identify the buyers and sellers and any other parties involved in the purchase.
For instance, when recording your name, ensure that you do it under the “Buyer” section. This should be followed by the building number and street address labelled “Mailing Address Of.” Remember that asset purchase agreements need to display the official name of the purchaser, and if you’re a business entity, don’t forget to include your legal name, including status like (“LLC”,” Corp” or “Corporation”).
If you’re naming the parties with authority to sell, ensure its done under the “seller” section. Check on the first empty line and write down the full name of the seller. You should then continue to the second space indicated “Mailing Address Of” and indicate the seller’s address. In most cases, this will be the street, building number or a P.O. Box Number.
Identity of assets
Asset identification is important as it makes it easier to determine the number of assets to purchase.
Here are a few you should know:
While it’s obvious that you should identify the tangible assets you wish to purchase, be descriptive and specific as possible. For instance, if you’re acquiring land, ensure that you provide the exact details indicated in the land records. This includes things like the available parking space, number of buildings, and acreage. If it’s a business, don’t forget to include a list of equipment available. When it comes to services, list down the type of the services and what such services include. Always ensure that the details you take to correspond with government records, or your transaction may fail.
Like tangible assets, you should also have a detailed record of intangible records, including things like goodwill, patents, account receivables, etc. It’s essential to have proper records of such assets because a business has intellectual and legal rights to them.
The asset price you wish to acquire and how to pay it is a valuable component in an asset purchase agreement. For instance, if your purchase involves financing by the seller, you may pay part of the purchase price then sign a promissory note as an assurance that you’ll clear the remaining amount.
When acquiring assets on loan, your contract should indicate whether you have to make payments at once or in installments. You’ll also have to decide whether to pay in stock.
This is a sale commitment you make with a seller with the agreement that you’ll complete the full amount within a particular duration. The amount you’ll pay will be discounted after making the purchase. If you wish to purchase an asset and don’t plan to make a deposit, you can indicate this by selecting the checkbox “A Deposit By The Buyer Is Not Required.”
If you make a deposit, make sure that you indicate it on the purchase agreement by selecting the checkbox “A Deposit Is Required”, then specify the amount on the blank line before “In The Amount Of.” Remember that if a seller accepts a deposit but doesn’t accept the return of goods once they’re sold, they will indicate it by checking the “Non-Refundable” option.
Remember that such a rule will not apply for any goods damaged after inspection and whose actual worth is already established. If a seller accepts the return of goods after they are sold, they’ll indicate it on the checkbox” Refundable.” This shows that you’ll receive a refund of your deposit if your sale is terminated without processing.
This involves the survey and assessment you make to determine the physical condition of an asset. Such analysis is crucial in creating data that can be used in the effective management of such assets over their life-cycle. If you plan to inspect the assets before committing to a purchase, make sure that you check the “Shall Be” checkbox, then fill in the number of days you wish the inspection to be complete under the black line after “Days to Review” or” A Period Of.”
If you agree with the seller that there’s no need to undertake an inspection of the assets you wish to buy, you should select the checkbox “Shall Not.”
Provisions for payment
If you plan to purchase an asset, it’s essential to know the approaches to consider when making your payments. That being the case, here are a few provisions for payment you should know.
Down payment will help you gain ownership of an asset by making monthly payments to cover the full amount. Understand that you can get a lower interest rate if you pay a high down payment because the risk taken by the bank is reduced significantly.
The terms of an asset purchase is the agreement you make with the seller that details the deadlines to meet and compensation to make. It defines what you’ll need to do to complete a business asset purchase.
The payment due date is the latest payment you should make on a debtor invoice before it’s considered overdue. This is usually the case if you have purchased an asset on credit and making monthly payments. The due date outlines when to expect payment and the penalties to expect if the agreed date passes without any payments being made.
Before finalizing the purchase of an asset, you have to know how your transaction can be carried out.
Check out the common financing options in an asset purchase agreement highlighted below:
This is the type of payment whereby the specifics of a sale like the fixed payment to complete a sale depends on future events. Given that such transactions are based on the payments that will occur in the future, you cannot determine the selling price at the end of the taxable year.
By checking the “Contingent” option in an asset purchase agreement, it means that your sale can only progress if a seller approves a loan amount that you request.
This is where you buy out from an asset purchase agreement. Most purchase agreements have clauses that allow you to buy out of the contract without suffering any penalties. So, you won’t suffer any penalties if you decide to pull out based on any of the listed contingencies.
You should check the “Not Contingent” option in an asset purchase agreement if you plan to pay for assets with your own capital without any additional financing. However, you’ll still need to provide evidence to show your payment ability.
Before you can purchase a company’s asset, you should know whether you need third-party approval. Some businesses agree with third parties like franchisors, equipment lessors, and landlords. So, if you purchase an asset from a seller, you should obtain third-party consent before finalizing the transfer.
If you proceed without such approval, you’ll be liable for the damages resulting from such action. So, if the asset you wish to buy depends on your credential and that of the seller, you should check the “No Requirement For Third-Party” option. If there’s a third party required, check the “Requirement For Consent By Third Party” then indicate the third-party’s name on the black space provided.
Your asset purchase agreement should specify the date when you expect to make a down payment or payment for the assets you wish to purchase.
Here’s what you should know about closing dates and costs:
This is the date when you finalize the purchase of an asset. This date is different from the effective date, which is the specific date when a transaction was scheduled to occur. Sometimes the closing and effective date can be on the same day. However, it can differ if you already set aside a particular date to close complete a sale and the seller delayed it. The closing date on your purchase agreement should be indicated under “this transaction shall be closed on”, and there will be an option to include time and check whether it’s AM or PM.
This is the fee you have to pay when you finalize your asset purchase. The details on the amount you should pay will be indicated on the contract. Remember that if you’re going to bear the closing cost, you should indicate it by checking the “Buyer” option at the closing section of your purchase agreement. You can select “Seller” if you and the seller will each bear your own expenses for closing the sale.
Conditions or requirements
There are plenty of conditions you should take into account before the close of a transaction. For instance, some transactions may require the approval of third parties or the involvement of government agencies before the final sale.
You could even decide to make final price adjustments based on the working capital, balance sheet differences, loss of asset value over time among others. You’ll still need to decide the individual who can handle your taxation and how your transaction can be characterized regarding the property.
Quality of the asset
In some cases, the asset you purchased from the seller may undergo degradation in condition or quality once the inspection is complete. So, under the assurance of quality section in a purchase agreement, you and the seller have to commit the number of days needed for negotiation after the goods are damaged. This should be filled under the section “The Parties Shall have.”
Mediation and arbitration terms
The mediation and arbitration terms in an asset purchase agreement provide a framework for resolving disputes that may arise after finalizing your agreement. If you have any concerns with your agreement and want to pursue mediation, you’ll need to find a third party who’ll help you and the seller reach a compromise.
Under the mediation and arbitration section of your asset purchase agreement, there’ll be a section where you’ll fill in the name of the county and state where the mediator who’ll settle your disputes will be found. The same case applies if you wish to pursue arbitration in case of a dispute.
This is a section of your contract that stipulates the state laws governing your agreement. So, before finalizing your purchase agreement, you should ensure that you specify the state applicable in your agreement. This way, if any aspect of your contract is voided, the entire deal won’t be valid.
Also referred to as the choice of law are the clauses that specify the laws governing the enforcement of your purchase agreement terms and conditions. So, if your asset purchase agreement doesn’t specify the governing law, a court will have to determine the governing law that applies to your case.
When determining the applicable law, a court will have to take different aspects into account. This will include your type of contract and what it covers, and where each party is located and operates.
Representations and warranties
The representation and warranties section on an asset purchase agreement covers promises on what should be sold. This section will also cover the quality or condition of items and warranties regarding the fitness of a product. Note that a warranty acts as indemnity in cases where the asset doesn’t attain the agreed condition.
This will favor you because the seller is responsible for providing a warranty, among other important disclaimers. In cases where a seller cannot guarantee the quality of an asset, you can take measures to protect yourself, including litigation or termination of your contract.
Authorization and approval
Before your asset purchase is finalized, both parties involved in a transaction have to approve their involvement in a transaction.
When purchasing an asset, you need to understand that the terms and conditions between you and the seller aren’t enforceable unless they’re signed. So, before finalizing the purchase of an asset, ensure that you and the seller sign on the space provided under the “Seller’s Signature” and “Buyer’s Signature.”
Your purchase agreement must specify the closing date of your purchase. This is important as it indicates the day when your transaction was finalized. The date will be stated immediately after the buyer’s and seller’s signatures.
Your name and that of the seller should be indicated in your purchase contract. This will show the two parties getting into a contract.
Post completion requirements
If you expect to have a successful agreement, it should be negotiated by a reputable lawyer. With the help of a knowledgeable legal expert, you should be sure that your interest will be protected. Other essential post-completion requirements include post-completion audits, the land tax, and companies act filing, etc.
Advantages and Disadvantages of APA
Before you get into an asset purchase agreement, weigh the advantages and disadvantages of the deal. Be sure to evaluate the future tax complexities and complexity of completing the deal. Most buyers prefer asset purchase agreements because of the security of tax benefits. But, such contracts can sometimes be complex and require both sellers and buyers to be keen.
Here are a few pros and cons of asset purchase agreements you should know:
Following are the advantages of an asset purchase agreement:
It’s convenient to choose a transaction
With an asset purchase agreement, you have the option to select the assets to include in your transaction. This is important because you won’t be exposed to any hidden and unknown liability a seller chooses not to disclose.
You’ll get assets at a fair price
Asset purchase agreements offer you the option to allocate the price among assets to reflect the current market value. This provides for a high amortization deduction that results in future tax savings.
A simplified transfer of ownership
With an asset purchase agreement, it’s possible to move different elements of your business like inventory and digital content. You can even transfer complex sites with multiple different moving within a few weeks.
It’s possible to depreciate your assets
After you have purchased an asset, you can begin to depreciate it immediately. This will involve deducting the asset’s cost from its taxes, leaving you with a lower tax bill. Remember that your asset’s depreciation rate will largely depend on your inventory, type of asset (website vs digital products Vs inventory), among others.
Following are the disadvantages of an asset purchase agreement:
Complexities in transfer of ownership
The challenge with asset agreements is that every item in the deal needs to be transferred according to the rules governing third parties’ approval. This is common for customer contracts where a third party may consider a transaction as a chance for renegotiating their contract. When this happens, it can delay your deal and result in additional transaction costs.
Additionally, some sellers may draft contracts where some consents and licenses are unique to them. So, if you’re expecting to preserve many customer relations, you may decide to buy shares instead of assets.
The challenges with liabilities
In cases where you fail to include some liabilities in your purchase, the seller will work ways to ensure that you don’t purchase for less than a fair price after the sale. Otherwise, such a transaction could be considered fraudulent.
Following are some free downloadable templates for you:
Asset purchase agreements are designed to ensure that a company’s sale is completed with minimal issues. Such contracts have different components which guide how the contract should be executed. So, it’s essential to familiarize yourself with the basic elements like contingency pay, governing law, closing cost, among others.
This helps you avoid the need to go for arbitration or mediation once you finalize an agreement. It’s also important to be aware of the advantages and disadvantages of asset purchase agreements before getting into any contract.