Anatomy of an Asset Purchase Agreement - Part 1 of 3
About Asset Purchase Agreements
Asset Purchase Agreements are often long, complicated, and hard to understand. If you learn their common structure, it can be easier to make sense of the parts. This is part one of a three part series about Asset Purchase Agreements (“APA”).
An APA is used to purchase the assets of a business. It might be used to buy part of a business, or to buy an entire business or division.
Outline of APAs
Well-organized APAs tend to follow a common structure, often with the following sections:
Introduction & Background
Definitions
Purchased Assets & Purchase Price
Closing
Seller Representations & Warranties
Buyer Representations & Warranties
Covenants
Conditions to Closing
Indemnification
Termination
Miscellaneous
Exhibits
Each section is briefly discussed below and in the articles that will follow.
Introduction & Background
The introduction to an APA identifies the buyer, the seller, and any other parties. The other parties might include the seller’s owners, the guarantors, or other companies that are related to the buyer or seller.
The background section (sometimes called “recitals”) provides context about the agreement. Sometimes this is as simple as a statement that the seller wants to sell the assets to the buyer. If the APA is part of a larger transaction, the background section will be more detailed.
Definitions
Many APAs begin with a definitions section. This section assigns specific meanings to particular words used in the APA to avoid ambiguity.
Definitions serve as a shorthand for words or phrases that are used multiple times in the APA. Listing the definitions in one place prevents an agreement from getting repetitive and cluttered. It also makes it easier to use the defined terms consistently.
For example, an APA might contain this definition of a “Lien”:
“Lien” means any lien, encumbrance, pledge, or restriction.
This way, whenever the APA mentions a lien, it could use the capitalized term “Lien” rather than repeating the longer string of words. Defined terms are usually capitalized throughout the APA, in order to signal that they have a specific definition.
Purchased Assets & Purchase Price
This section is one of the most important ones in the APA. It identifies:
the assets that are included and excluded from the sale
the liabilities that the buyer is becoming responsible for
the liabilities that the seller remains responsible for
the purchase price
the payment method and timing
the purchase price adjustment mechanisms
Closing
This section describes the closing date, time, and location. When the sale is completed, it is called the “closing”. Sometimes a closing occurs at the same time the APA is signed. Other times, the APA signing and the closing are not simultaneous, and the APA is signed first.
This section also describes the procedures for the closing. It’s common to list the documents and agreements that will be exchanged at the closing. Examples include a bill of sale and an assignment agreement. Often, the forms of these “ancillary agreements” will be negotiated in advance and attached to the APA as an exhibit.
Conclusion
The next article will discuss some of the most heavily negotiated sections of APAs:
Seller Representations & Warranties
Buyer Representations & Warranties
Covenants
Asset Purchase Agreements are varied and often complex, but they do share common elements. There is no substitute for legal advice from an experienced acquisitions attorney. That said, you’ll get more out of the legal advice if you have a “big picture” understanding of an Asset Purchase Agreement, which will help you make sense of the parts of it.
Read Part Two of this series or Contact us today to discuss your Asset Purchase Agreement.