When should I get an Asset Purchase Agreement?

Whether it’s as a result of an investment opportunity or change of strategy, businesses change hands frequently. Buying or selling a business is a major undertaking and requires a comprehensive document finalising and evidencing the terms on which the transfer is taking place. Rather than transferring all the assets and liabilities of a company, this agreements allows the buyer to cherry pick which assets and contracts it wishes to take over and leave the seller with any unwanted baggage and liabilities. It details not only the sale process and sets out what is being sold, but also specifies the liabilities and obligations of both parties in relation to the sale.

Why is it important?

Once a seller has found a willing buyer and the headline terms for the transfer have been agreed between them, the key commercial terms of the deal are often set out in a ‘memorandum of understanding’ (MOU). Not only do MOUs help structure negotiations and flush out any confusion and differences of opinion well in advance of drafting the formal agreement, they also serve as a useful benchmark for the parties to see how far off they are from concluding the final deal. These are not, however, legally binding, so will need to be fully negotiated and incorporated into a binding contractual agreement on which the parties can rely.

What it is / what should be included?

The buyer will usually take the lead in drafting the asset purchase agreement. Set out below are some of the key points which should be included. It is advisable to bring these issue to the table early on in discussions so that there are no surprises further down the line.
  • What exactly is being sold? Asset purchases only transfer the assets identified in the agreement but usually do not include things like the seller’s pre-existing cash, debts and liabilities It is therefore crucial to cover everything intended to form part of the transfer. This commonly includes machinery, equipment, as well as rights to use the stock, business name and intellectual property rights belonging to the company.
  • On what date is the transfer to take place? Delivery of the assets should be specified to take place as soon after this date as is reasonably practicable. Is the sale conditional on the happening of certain events (e.g. third party consents)? If so, these should be sufficiently clear and objective and a time limit set for their completion.
  • What is the purchase price and how is payment to be made? This is key and tax treatment will largely depend on the wording of this provision; specialist advice may need to be taken in respect of tax considerations. Payment may be made by way of a one-off cash deposit, several instalments, a bank transfer or other payment terms mutually agreed between the parties.
  • Will the contracts of employment of staff under the old company transfer across to the new company? Usually this is the case by default and, if any claims are made in connection with their employment before the transfer, the seller is generally expected to take these on.
  • What warranties is the seller to give the buyer? At a minimum these should include the fact that the seller is the rightful owner of all the assets being sold under the agreement, that nobody else has any claims over or entitlement to them and reflect any particular issues which emerge as part of the due diligence exercise (e.g. relating to the condition of the assets or the validity of the business contracts etc.). These warranties are the buyer’s principal contractual protection, breach of which entitles them to compensation to put them in the position they would have been in had the value of the business been what the seller promised (without going as far as being able to terminate the contract).
  • Is the agreement guaranteed? In other words, will there be a guarantor backing the obligations of the seller so that if, for example, the seller breaches the warranties then the buyer can claim against a solvent third party and be sure to recover what it is owed? Often this will be a parent company or even a bank. Should the seller be prevented from becoming involved in a competing business, or poaching customers or employees of the business? Usually these types of restriction will be included within a limited period following the transfer (e.g. 6 months to 2 years).
Before arriving at the point of signing, the buyer will already have been privy to sensitive information relating to the business. The seller would therefore be wise to require any prospective buyer to sign a non-disclosure agreement before sharing any confidential information.

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