Why Asset Purchase Agreements Are Important

A well-written asset purchase agreement can help alleviate the stress of asset transfers. These agreements provide for the sale of a seller’s tangible and intangible assets and liabilities to a buyer in return for cash or other forms of payment. Merger and acquisition transactions are complex, and having an asset purchase agreement can help keep the transaction running smoothly for both the seller and the buyer during this challenging process. Mergers and Acquisitions have substantial rises and potential rewards for both parties involved.

There are a few essential provisions of asset purchase agreements.

In asset purchase agreements, acquired assets, assumed liabilities, and retained liabilities and assets are all specifically enumerated.

Asset purchase agreements provide instruments necessary to transfer ownership. They provide a bill of sale, intellectual property assignments, and real property transfer documents.

Asset purchase agreements, including the particular representation that the asset being purchased are sufficient to operate and acquire business after closing.

Shared assets with another business will require special provisions for their treatment in the asset purchase agreement.

Asset purchase agreements can be broken down into the most common outline. Although this is the most common path of an asset purchase agreement, there can be different variations depending on the type of sale.

Preamble and recitals

The first paragraph of an asset purchase agreement is known as the preamble. It names the agreement, introduces the parties, and sets the effective date of the contract. After the preamble, there will be a series of statements known and Recitals. They lay out the intentions of the transacting parties and provide context online, later attempting to interpret the asset purchase agreement.

Definitions

The asset purchase agreement provides an alphabetical list of definitions of important terms used throughout the contract. They are critically important and may substantially alter the effect of the provision in their use.

The Transaction

The transaction will outline the specific terms of the sale. There will be a similar provision relating to the excluded asset that the seller will retain. This will also set the purchase price and any price adjustments. This area will also find the documents and other things that must be exchanged between the parties at the closing.

Seller Representations and Warranties

Asset purchase agreements contain representations and parties from the seller about the target business. Representations and warranties are statements of facts relating to the business assets, liabilities, properties, and merger and acquisitions transition to another.

Buyer Representations and Warranties

The asset purchase agreement will have reciprocal representation and warranties from the buyer to the seller. If the buyer is issuing shares as all or part of the purchase price, then its representation and warranties will mirror the seller reasonably closely.

Covenants

Covenants will cover the gap period between signing and closing. This will govern the parties and their activities during this time and after closing. There is usually an access and inventions covenant where the seller promises to permit the buyer access to the acquired business and its books and records before closing. The covenants will also require the seller to notify the buyer of certain material developments impacting the acquired company or transaction.

Closing Conditions

If the sale has a gap period between signing and closing, there will be conditions that must be satisfied in the asset purchase agreement. A buyer will also require as a condition that the acquired business will not have experienced a material adverse change. An unfavorable change in the acquired company is consequential to its long-term earnings power. A buyer may be able to negotiate for a retirement that it will have secured financing or satisfactorily completed its due diligence examination of the target.

Indemnification

The asset purchase agreement will provide for indemnification rights, which entitle each party to be compensated by the other for losses suffered on account of a breach of any other party’s representations, arrangements, and covenants. Indemnification may also be extended to losses arising from specific causes. The seller will provide indemnity for losses incurred by the buyer due to “Retained Liabilities.” The buyer will offer a reciprocal indemnity concerning “Assumed Liabilities.”

Termination

Suppose these conditions are not satisfied or waived. Every asset purchase agreement contains items describing each party’s termination right. This includes termination due to failure of a condition and termination by mutual consent.

General Provisions

The asset purchase agreement will contain an article dedicated to miscellaneous provisions covering a variety of subjects, including expenses, covering law, notice, disputes resolution, expenses, severability, counterparts, assignment, amendments, and more.