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Asset Purchase Agreements

What is an Asset Purchase Agreement?

The purchase of an existing, on-going business may be typically structured in one of three different ways:

1.a merger of the two businesses;

2. a stock purchase (or a membership interest purchase if the entity is an LLC); or

3. an asset purchase.  The basic form or structure of the transaction must be determined very early in the negotiations, and only after you have received counsel from (a) your certified public accountant; (b) a business valuation analyst; and (c) your attorney.  Often the parties will desire to summarize their preliminary understanding with a negotiated letter of intent.

When do I need an Asset Purchase Agreement?

The structure of a business acquisition may be compelled by a number of matters, for example, the sellerís known, unknown, and contingent liabilities; or the sellerís tax position in a major asset; or sales price financing issues; or required consents and approvals.  For the smaller business, more often than not the buyerís tax and legal professionals will encourage the buyer to structure the acquisition as an asset purchase to avoid or limit issues relating to the assumption of sellerís liabilities (disclosed, undisclosed, and contingent).

What are some concerns related to an Asset Purchase Agreement?

Asset purchase agreements are often very complex because of the buyerís numerous concerns, for example: the sales price, payment or financing of the sales price, defining the assets which will be purchased, identifying proprietary information and intellectual property to be purchased (including the sellerís business name or trade name), sellerís liabilities assumed, sellerís liabilities not assumed, inventories of assets and inventory, closing date, sellerís representations and warranties to the buyer, sellerís indemnification of the buyer, covenants not to compete, post-closing cooperation by seller, conditions that must be fulfilled before buyer is obligated to purchase, and risk of loss for a casualty or catastrophe that occurs before the closing.  And all of these maters must be addressed so that the buyer clearly understands both the upside and the downside of the transaction.  Normally the buyer will make an offer to purchase in the form of an asset purchase agreement which is prepared by the buyerís counsel.

I assist both the sellers of businesses and the buyers of businesses in the negotiation and preparation of asset purchase agreements.

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