Asset Purchase Agreements: How to Come Out on Top in the Sale or Purchase of Your Company
What is an Asset Purchase Agreement?
An asset purchase agreement is one of the more common methods of selling/buying a company. In most asset acquisitions, the buyer only acquires the assets and liabilities it identifies and agrees to acquire and assume. This is different from a stock acquisition or merger where the buyer acquires all the assets and liabilities of the target company as a matter of law (including unknown or undisclosed liabilities). In some acquisitions, the buyer only acquires limited assets and liabilities. If the buyer acquires substantially all of the assets of the seller, the buyer is acquiring an ongoing business and the transaction is substantively (but not procedurally) similar to a stock acquisition or merger.
What Key Issues Should I Consider when Drafting an Asset Purchase Agreement?
While each deal has different issues, there are certain provisions in the asset purchase agreement that the buyer and seller typically negotiate. Key issues to consider when drafting or reviewing a first draft of the asset purchase agreement are:
Key definitions. The definition of terms such as "material adverse change" and "knowledge" are often heavily negotiated because they can significantly affect the allocation of risk between the parties.
Purchased assets and excluded liabilities. The parties carefully consider what assets the buyer is purchasing and what liabilities it is assuming. Often the parties negotiate what liabilities should be assumed by the buyer or excluded from the acquisition.
Escrow provisions. Parties negotiate whether to escrow any portion of the purchase price. If there is an escrow, the parties negotiate how much of the purchase price is escrowed, how long it is escrowed for, mechanics for its release, and the identity of the escrow agent.
Purchase price adjustments. Parties negotiate whether there will be a post-closing adjustment of the purchase price and if so, the parties negotiate the mechanics of the calculation and how disputes are resolved.
Representations and warranties. Parties negotiate the scope of the representations and warranties. For example, if the buyer is only purchasing certain enumerated assets and liabilities, the seller will try to limit the representations and warranties to those areas. Parties also negotiate whether a representation and warranty may be qualified by materiality, material adverse effect, knowledge, or the disclosure schedules.
Closing conditions. In addition to the usual standard conditions to closing, deal-specific conditions, such as obtaining buyer financing or third-party consents, are typically topics of negotiation.
Covenants. Parties negotiate the scope of the restrictive covenants. For example, the buyer usually tries to limit the actions of the seller under the interim operating covenant while the seller generally tries to expand what actions are permissible. The parties also negotiate the inclusion and scope of other common restrictive covenants such as a no-shop (or exclusivity) and a non-compete. Another key area of negotiation is the allocation responsibility for liabilities in post-closing covenants such as those arising from employee and tax matters.
Termination. Parties negotiate who has the right to terminate the agreement, under what circumstances, and whether break-up fees are payable in connection with a termination. If the agreement provides for the payment of a break-up fee, the parties negotiate the size of the break-up fee.
Indemnification. Parties negotiate what is indemnified and the procedure for obtaining the indemnification. Limitations on indemnification are also heavily negotiated (for example, the size of any caps, baskets, or deductibles).
Dispute resolution. The parties often negotiate whether to include a provision for alternative dispute resolution (ADR) and if so, the procedure for ADR is also typically negotiated.
A purchase of assets, rather than one of the other reorganization transactions, may be considered favorable to a buyer for a variety of reasons, including:
Getting complete control over the assets of the seller.
Getting to pick and choose which assets it wants.
Limiting liabilities to liabilities it wants.
Allocating purchase price in a variety of ways.
However, asset purchases are more time-consuming than a stock acquisition. This is because a transfer of title for each asset must be accomplished. In addition, a transfer tax may be incurred. A third party with a right of first refusal can also make the deal complicated. Finally, the seller may not be able to take advantage of favorable grandfather rights, or favorable ratings for unemployment tax or insurance purposes. These considerations should be determined before the form of the sale is determined.
If you need help drafting, enforcing, or defending an asset purchase agreement, or have any questions about selling or purchasing companies in Colorado, fill out an interest form today to see if GLO can help you.
GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific fee arrangements and signed engagement letters. GLO does not guarantee any results.