An asset sale is a type of business transaction in which a buyer purchases all, or part of, a selling business’ assets. Where the sale is for substantially all of the selling business’ assets, the sale is, in effect, a sale of the business itself. Asset sales are one of the most popular deal structures when buying or selling a business because, unlike an equity sale (another popular structure), an asset sale generally does not transfer the business’ liabilities to the buyer—an attractive proposition for buyers looking to limit their risk.
An asset sale may provide beneficial opportunities to both the buyer and seller involved in the transaction. As noted, one of the main draws of an asset sale for a buyer is that an asset sale typically does not include, or transfer, the selling business’ liabilities. This results in a lower level of risk for the buyer, as they are able to only acquire specific assets and liabilities, rather than an entire business, and can limit or avoid assuming any unwanted liabilities that may exist in the target company. An asset sale may also provide a buyer with favorable tax options, as a buyer can allocate the purchase price among the different assets being acquired, allocating the price among items with higher and lower tax rates in a beneficial manner. From a seller’s perspective, an asset sale may also be an attractive sale structure, as an asset sale can result in higher valuations for assets, and may also allow a seller flexibility in choosing whether to sell or retain only certain assets, business units, or product lines.
Although asset sales can offer numerous advantages to both buyers and sellers, and are often the preferred acquisition method of buyers, asset sales can also present drawbacks. One of the largest drawbacks of an asset sale is that asset sales are often more complicated and time-consuming than an equity sale, as the parties must negotiate and transfer ownership of the individual assets being sold, rather than the company as a whole. Additionally, because an asset sale results in a new legal entity taking ownership of existing property (as opposed to taking ownership of the existing business entity), third-party contracts, such as leases, customer contracts, and employee agreements, often require third-party approval, and must also generally be assigned or re-negotiated.
An asset sale is most often accomplished through negotiation and execution of an Asset Purchase Agreement or “APA.” That said, an Asset Purchase Agreement or APA itself typically does not transfer legal title to the assets being sold. Instead, transfer of legal title to assets is usually accomplished through subsequent execution of related agreements, such as Bills of Sale and Assignment and Assumption Agreements. Although such ancillary agreements are often called for in an Asset Purchase Agreement, they are generally not executed until closing, which may be weeks or months after the Asset Purchase Agreement was originally signed. In any event, because the Asset Purchase Agreement generally lays out the structure of the transaction agreed to by the parties, it is often the most heavily negotiated, and important, document in an asset purchase transaction.
Because every deal is different, Asset Purchase Agreement should be carefully drafted to fit the needs of each individual transaction. However, some key provisions that appear in many Asset Purchase Agreements, and that should be carefully reviewed and negotiated, include the following:
1. Definition of Purchased and Excluded Assets. Because an asset purchase may not involve all of a business’ assets, the Asset Purchase Agreement must clearly identify and define which assets will be sold in the transaction, and which assets will be retained, or excluded, by the seller. Although transferred assets commonly include tangible assets, such as property, inventory, and equipment, and intangible assets, such as intellectual property and goodwill, Asset Purchase Agreements often exclude other types of assets, such as accounts receivables and cash.
2. Purchase Price and Payment Terms. Although the purchase price of the assets involved in a transaction is often one of the more straightforward provisions in an Asset Purchase Agreement, the payment terms can be, and often are, much more complicated. Because asset sale transactions, especially larger sales, rarely call for a single lump sum cash payment at closing, the Asset Purchase Agreement should clearly lay out if, and how, various payments or promises, such as escrow payments, cash payments, promissory notes, or inventory payments, will make up the purchase price. Likewise, the Asset Purchase Agreement should also clearly lay out if, and how, scheduled payments should be made, and include terms discussing interest rates and penalties for late payments.
3. Representations and Warranties; Indemnities. Buyers to an Asset Purchase Agreement will often want sellers to make various representations and warranties concerning, among other things, the condition of the assets being sold, the seller’s legally authority to agree to the transaction, and the seller’s promise to protect the assets until closing. Such representations and warranties are important to ensure that the buyer receives what they are paying for. Asset Purchase Agreements will also generally include indemnification provisions which provide each party with remedies in the event the other party breaches any obligation under the Asset Purchase Agreement, such as if a seller makes a false representation that results in a buyer's loss. Because such provisions provide important rights and remedies to, and place binding obligations on, each of the parties to an Asset Purchase Agreement, such provisions are often heavily negotiated in Asset Purchase Agreements.
4. Closing Conditions. The parties to an Asset Purchase Agreement should agree on the conditions that must be met before the sale can be completed. Often, this requires the selling party to, among other things, provide the purchasing party with time, documents, and access reasonably necessary to allow the purchasing party to conduct reasonable due diligence into the assets or business they are purchasing. Likewise, closing conditions also often require the parties to agree to various ancillary documents that are necessary to complete the transactions, such as Bills of Sale, Assignment and Assumption Agreements, Promissory Notes and Security Agreements, and Non-Compete Agreements. Lastly, another key condition that is often listed in Asset Purchase Agreements as a closing contingency is the approval from key third parties, such as regulatory approvals, landlord consents to lease assignments, and financing approvals.
5. Taxes. Because asset sales carry important tax implication for both buyers and sellers, the parties to an Asset Purchase Agreement should carefully consider the tax implications of the sale, consult with tax professionals, and include provisions in the Asset Purchase Agreement for not only the allocation of taxes between the parties, but also for the allocation of the purchase price among the sold assets.
The above are only a few of the key considerations that should be carefully considered when negotiating or entering into an Asset Purchase Agreement. As noted, numerous other provisions should also be taken into account, and each Asset Purchase Agreement should be carefully tailored to best fit the specific needs of each individual transaction.
