As a business owner, you may find yourself in a situation where you want to sell your company. When that happens, one of the options in the sale process typically involves drafting an asset purchase agreement (APA). An APA is a legally binding contract that outlines the terms and conditions of the sale of a business’s assets versus a stock purchase). But what exactly does that mean for you as a seller? In this article, we’ll explore the basics of asset purchase agreements and how they work.
What is an Asset Purchase Agreement?
First, let’s define the basics. An APA is a legal document that dictates the terms and conditions of the sale of a company’s assets. These assets can be anything from real estate and machinery to intellectual property and customer lists. Essentially, anything that contributes to the business’s operation is considered an asset and can be included in an APA.
What is Included in an Asset Purchase Agreement?
An APA typically includes provisions for the purchase price and payment terms, the list of assets being sold, any liabilities or contingent liabilities associated with the assets, details about employees and customers, and terms governing the closing of the transaction. The agreement may be complex and may involve multiple schedules and exhibits to cover all aspects of the transaction.
Advantages and Disadvantages of an Asset Purchase Agreement
One of the primary advantages of an APA is that it allows the buyer to specify which assets they are interested in purchasing, leaving liabilities and risks with the seller. That being said, if the seller has liabilities related to the assets being sold, they may still be responsible for them post-sale. Additionally, there may be tax implications, as different tax rules apply to the sale of assets versus stock.
Differences Between an Asset Purchase Agreement and a Stock Purchase Agreement
It’s important to note that an APA is different from a stock purchase agreement, which involves the transfer of ownership of a company’s stock rather than its assets. In a stock purchase agreement, the buyer acquires ownership of the entire company, including its assets and liabilities. On the other hand, an APA allows the buyer to pick and choose which assets they want to acquire, leaving any liabilities behind.
Key Considerations when Negotiating an Asset Purchase Agreement
When negotiating an APA, it’s important to consider any contingencies or potential issues that may arise during the transaction. Be mindful of retaining critical employees and customers and be aware of how any liabilities related to the assets are being addressed. Additionally, it’s critical to review tax implications, including any potential capital gains taxes.
Ensure a Smooth Transition
If you’re planning on selling your business, understanding the basics of an APA is essential. By outlining the assets being sold, payment terms, and other critical information, an APA can help ensure a smooth transition of ownership. However, it’s also important to be aware of potential risks and liabilities associated with the sale. Working with an experienced investment banker can help ensure you’re protected throughout the process.