Asset Purchase Agreements are the mechanism by which a company acquires a seller-company’s assets, customer list, intellectual property, and even its name, without purchasing the seller company. This agreement is frequently utilized during a merger and/or acquisition. An Asset Purchase Agreement excludes the related stocks and the underlying company from which the assets are being purchased.
For example, if your business wishes to purchase the customer list or equipment of a competitor that is retiring or going out of business, or even the ongoing business itself so that you can continue to operate it you will need an Asset Purchase Agreement.
These agreements are a great opportunity for two parties to come to a mutually beneficial agreement. The Asset Purchase Agreement is an occasion to fully outline the needs, wants, and liabilities of each party so that an agreement may be reached. Within the body of the agreement, each party can stipulate specific requirements such as cost and timing specifics, as well as how to notify customers and treat them during the transition in ownership or what condition the acquired assets must be maintained in, and even which assets or liabilities of the seller-company will not be acquired.
There are several key elements to an Asset Purchase Agreement, one of the most important of which is due diligence. The due diligence stage of the purchase is the opportunity for the buyer-company to investigate the seller-company and determine the condition of the assets being sold, whether those assets are physical (such as equipment), intangible (such as contracts), as well as the general condition of other aspects of the seller-company. This post provides a simplified explanation of key aspects to Asset Purchase Agreements, and which elements are essential for the due diligence needed when acquiring assets.
Elements of Due Diligence to Execute an Asset Purchase Agreement
Pre-existing Documentation
Pre-existing documentation is the first thing to collect when attempting to execute an Asset Purchase Agreement. Pre-existing documentation includes but is not limited to corporate formation documents, bylaws, partnership agreements, company policies and handbooks, meeting minutes of the board of directors and related consents, and any certificates of good standing issued by a government entity. Acquiring this information will provide the necessary background and character of the Seller in order for the Buyer to better understand it and ensure that it has been operating consistent with those documents.
Another type of pre-existing documentation that is essential to acquire is the background financials of the Seller. Balance sheets, profit and loss statements, lists of debts, lists of all inventory and assets, lists of accounts receivable and lists of accounts payable can illuminate the financial health of the company at interest. Additionally, thorough financial investigation can save the buyer major headaches down the road if they see something that does not add up.
Existing Interests
A key consideration in these agreements is information regarding any existing interests in real or intellectual property. This can include leases, subleases, deeds, and any documented interest in intellectual property or copyright. It is essential to understand a company’s pre-existing ownership and obligations of various types of property to avoid infringement or inadvertent breach of a pre-existing agreement. Failure to perform adequate due diligence in this area can result in undesired liability for the Buyer and possibly the Seller. For example, the trade name of the seller may be owned by a third party, such as one of the seller’s affiliates or parent companies. If the buyer intends to continue operating using the same trade name, it is vital to ensure that the intellectual-property rights are legally able to be sold.
Current or Prospective Litigation and Liabilities
Another element of due diligence that is paramount to protecting both parties is the inquiry into whether or not there is any current or prospective litigation related to either party. If either party is subject to any court order or judgment, all related documentation must be provided to the other party so there is a complete understanding of potential liability. Liabilities can be (and often are) assumed by another entity by virtue of an Asset Purchase Agreement, and it is essential for both parties to reach an agreement on this issue. The buyer typically has no desire to take on a liability like a lawsuit that has been previously filed against the seller.
Additionally, any other interested parties with claims to the assets to be acquired must be disclosed at the beginning of the process. The last thing a buyer wants to discover is that they have acquired an asset that incurs major liability or involves the interests of others outside of the agreement, as this limits their ability to control and maximize profit related to the acquired asset.
Pre-existing Agreements with Employees
Lastly, an often-overlooked aspect of an Asset Purchase Agreement is the seller’s pre-existing agreements with its employees, including its management team. It is crucial for a buyer, as part of their due diligence, to acquire a list of all the current employees of the seller and current agreements between seller and these employees. This way, the buyer may decide which employees it would like to include in the transfer and may include that employee’s agreement with the seller in their consideration, or enter into a new agreement with key employees.
Conclusion
There is a mountain of relevant documentation that must be collected and reviewed in relation to an Asset Purchase Agreement. Even a simple asset acquisition merits an investigation into each party’s corporate structure, financial health, and pre-existing liabilities and obligations. Inquiring as to background financials, corporate status, all existing assets, all existing liabilities, any and all interests in real or intellectual property, and subjection to court orders or judgments can ensure that each party to an Asset Purchase Agreement is fully informed and able to strike a deal or walk away if necessary.
Dye Culik is a corporate law firm based in Charlotte, North Carolina. Our attorneys work with businesses of all sizes on both sides of the mergers and acquisitions process. If you are buying or selling a business, connect with us for a consultation. We're here to help.