Kyle Shannon 
If your business is on either side of an important asset or property transaction, an asset purchase agreement (APA) can clear up vital details and provide legal protections for both parties. However, using an asset purchase agreement effectively depends on what it is and what should go into it. Once you understand the structure of a solid asset purchase agreement, you can customize future agreements from a single template to streamline transactions while maintaining the legal framework you need for deals to go through as planned. This guide will help you navigate asset purchase agreements with confidence.
What Is an Asset Purchase Agreement?
An asset purchase agreement is a contract between a buyer and seller agreeing to terms under which the buyer will purchase specified business assets or property from the seller. In most cases, the buyer and seller are both business entities, and the assets could be any or all of the seller’s business assets.
Why Use an Asset Purchase Agreement?
The most common application of APAs is in mergers and acquisitions. In this context, an APA allows the seller to sell all the business’s assets while retaining ownership of the business entity. Other common examples of asset purchase agreements include contracts to:
- Sell an entire business.
- Sell some, but not all, of a business’s assets.
- Buy high-value assets from another business, including intellectual property, equipment, or real estate.
- Buy business assets without taking on the business’s liabilities, employees, or unwanted assets.
- Clarify contributions and ownership rights in a joint venture.
- Acquire an asset from a business not already covered by previous purchase contracts.
In all these scenarios, an APA can help you:
- Ensure the transaction transfers the assets you want to buy or sell while excluding other assets and liabilities.
- Establish a legal basis for enforcing the terms of your purchase agreement if the other party violates them.
- Clarify essential details like assets to include and exclude, price and payment terms, warranties, and breach of contract provisions.
Necessary Parts of an Asset Purchase Agreement
What your APA should include will vary between purchases, but the following sections are necessary in most cases.
Preamble and Recitals
The APA’s opening section, called the preamble, should identify the buyer and seller. Assuming these parties are businesses, the preamble should name the agents who will sign the agreement on behalf of each business. The recitals are a series of statements following the preamble and describing the agreement’s background, parties, and overall intention.
Definitions
This is an alphabetic glossary of important, unique, or technical legal words in the agreement. If your agreement has long words or phrases occurring multiple times, you can provide abbreviations here and use them throughout the document for brevity.
Terms of Sale
This key section describes the transaction, including:
- Purchased assets: These are the tangible and intangible assets the seller is transferring to the buyer. The document may refer to an appendix with detailed descriptions of each asset.
- Retained assets: These are all the assets excluded from the purchase, which remain the property of the seller.
- Assumed liabilities: These are any liabilities the buyer assumes from the seller, such as vendor contracts necessary to continue business operations.
- Retained liabilities: These are all the liabilities remaining with the seller.
- Purchase price: The terms of sale section should specify the purchase price, when it is due, whether any deposit or installments are required, and any conditions resulting in price adjustments.
Additional Preclosing and Postclosing Covenants
When there is a period of time between signing the document and officially closing the transaction, preclosing covenants are agreements between the parties about what they may and may not do during this time. For example, the seller may promise to grant the buyer access to its financial records to conduct due diligence before closing the transaction.
Postclosing covenants are agreements about how the parties may and may not act after closing. Common postclosing covenants include the seller promising to keep strategic business information confidential and not to start a new business competing with the buyer.
Representations and Warranties or Disclaimers
This section contains statements by each party, including:
- Affirmations of key facts about the business and assets affecting the agreement.
- Promises called guarantees and warranties each party offers to assure the other about the transaction.
- Disclaimers of any guarantees or warranties either party wants to make clear that they are not offering to avoid liability.
- How each party may hold the other accountable for misrepresenting any facts or violating a warranty or guarantee included in the agreement.
Closing Conditions
These are conditions one or both parties must meet before the transaction can close. Common examples include completing the transfer of necessary operating licenses, honoring preclosing covenants, and the buyer obtaining the minimum necessary financing.
Indemnification
This section explains when and how each party may claim compensation from the other party if the other violates a warranty or other contract terms, as well as limits on these claims. Compensation in these situations is a form of legal protection called indemnification.
Termination
This section explains when, why, and how each party may end the agreement. It should explain how to terminate the agreement if due diligence reveals significant issues or if either party violates contract terms. If a deposit is involved, the termination section should explain the conditions under which the buyer may and may not receive a refund.
Breach of Contract Provisions
This section explains what actions would constitute a breach of the contract and what consequences would result.
General Provisions
Also called the boilerplate, this section contains legal provisions common to most contracts. It often includes a statement that the document contains the entire purchase agreement, superseding any other previous or current understandings between the parties concerning this transaction.
Signatures
All parties must sign the agreement. Signatures should come with official titles, names, and dates.
The Limitations of an Asset Purchase Agreement
An APA is only effective when it contains all the necessary information in the proper structure. Mistakes can lead to costly legal disputes or some or all of the contract’s provisions not being legally binding. If you plan on entering an asset purchase agreement, seek professional legal counsel to ensure the contract protects your interests. Remember, negotiating an APA that’s fair to all parties can take time and financial resources. If the transaction is significant, spending these resources is an investment in your legal and financial security.
Contact Crow Estate Planning & Probate for Legal Support
Whether you’re looking to buy or sell assets as a strategic business move, a profitable exit, or a family wealth transfer, it’s worth getting legal help to ensure your APA contract has all the necessary components. If you’re in Tennessee or Kentucky, you can get the reputable legal advice you deserve from Crow Estate Planning & Probate.
The skilled attorneys at Crow Estate Planning & Probate practice in estate planning, business planning, and real estate, bringing all the experience you need to review or create an APA for your transaction. Our attorneys excel at finding the most tax-efficient, affordable ways to complete asset transfers.
Contact us for a free consultation to discuss how we can help protect your interests and achieve your intentions for your planned asset transfer.
