Anatomy of the Asset Purchase Agreement

Whether you intend to sell or buy an existing business, odds are that your transaction will be governed by an Asset Purchase Agreement, or APA. Depending on the size and complexity of the transaction, the APA can easily run dozens of pages. Unless you make a habit of reading legal documents in your spare time, an agreement of this size can be quite daunting. Fortunately, most well drafted Asset Purchase Agreements share a similar basic structure. In this article, I will dissect a typical APA so that when the time comes to review your own APA, you will have a roadmap of what to expect.
Of course, no attorney can write an article of any kind without including a disclaimer, so here’s mine: the information provided in this article does not, and is not intended to, constitute legal advice. Rather, this article is intended for general informational purposes only. You should not act or refrain from acting on the basis of the information in this article. Instead, you should contact a qualified attorney to obtain advice unique to your particular situation.

Finally, in an effort to make this article an accessible overview of an Asset Purchase Agreement for non-lawyers, I’ve made a number of oversimplifications below. Please treat this article as a starting point to begin your research, not a definitive legal treatise. On that note, away we go…

Introductory Paragraphs

A typical APA begins with an introductory paragraph that identifies the Buyer, the Seller, and any other parties to the agreement. It will also identify the Effective Dateof the APA, which, it should be noted, may not be the same date as the Closing Date.  The Effective Date is typically the date that the APA is signed. The Closing Date is the date that the transaction is consummated (when the money gets exchanged and the assets are officially transferred to the Buyer). Often, the Effective Date and the Closing Date are one and the same. This is sometimes referred to as a “sign-and-close” deal because the parties sign and close simultaneously. It’s also common, however, to see a sign-then-close deal, where signing the APA is merely the first domino to fall before closing can occur. More on this in Article III.

You will also typically see Recitalsin the opening of the APA. Recitals are declarations about each party and its intentions. They are often helpful in setting the stage for the transaction. You may want to think of them as basic, non-binding notes that give a very brief summary of the deal.

Article I: Definitions

When reading through an APA, you may wonder why common nouns like Tax or Contract are capitalized. Was your fifth grade English teacher wrong when she taught you not to capitalize common nouns?  No, she just didn’t want you writing like a lawyer. Attorneys capitalize to indicate that a word has a defined meaning. (In fact, I’ve included some superfluous capitalization in this article to draw your attention to common APA jargon.) Where are these definitions found? Often, Article I in the APA is solely devoted to defining certain terms used throughout the document.

A lawyer drafting a simpler APA may choose to omit a Definitions article to save space. In this case, the definitions are found in the body of the APA. Also, some eccentric lawyers prefer to stick the definitions at the end of the APA or, worse, in an Exhibit, but that’s an argument for a different day.

You may be tempted to skip over these definitions. After all, who doesn’t know what “tax” means? But resist that urge: these defined terms are essential to the substance of the agreement. If you find yourself falling asleep somewhere between “Code” and “Indemnified Person,” try treating the Definitions Article like it’s a dictionary: read the other parts of the APA first, and when you see a capitalized term, flip back to the Definitions to learn its meaning. Just be sure not to assume that you know what a word means based on its common-usage meaning.

Article II: Purchase Price, Acquired Assets and Allocation

Finally, the interesting stuff. Article II tells you what the Seller is selling (the Acquired Assetsand Assumed Liabilities) and what the Seller is keeping (the Excluded Assetsand Excluded Liabilities).  Typically, almost every asset of the business is an Acquired Asset. Not all liabilities (such as contracts and warranties) become Assumed Liabilities, however. The Buyer may be unwilling to take on some (or even all) of the Seller’s obligations. Figuring out which liabilities will remain with the Seller and which will transfer to the Buyer is a crucial step in the negotiation of an APA.

Of course, this Article also breaks down exactly how much the Buyer is paying (the Purchase Price) for the Acquired Assets, as well as how and when the Purchase Price gets paid. Often, a transaction is as straightforward as an all-cash deal where the Buyer wires the full Purchase Price to the Seller at Closing. Other times, the Seller agrees to finance a portion of the Purchase Price through a promissory note. Occasionally, there is an Earnout, which is where the Buyer is only obligated to pay a portion of the Purchase Price if a certain event occurs, like if the business achieves a certain revenue threshold in the first year after Closing.

Article III: Defining the Closing

Article III identifies when the transaction becomes official, a process known as Closing.  It also lists the documents that each party has to bring to the Closing. Such documents often include corporate resolutions, which demonstrate that the Buyer or Seller has the corporate authority to enter into the transaction, employment agreements for key personnel, noncompetition agreements and certificates of good standing.

This Article may also identify Conditions to Closing, which are certain events that must occur before the transaction officially closes. For instance, in the sale of a franchise location, the Buyer and Seller may condition Closing on receiving consent to this transaction from the franchisor. If the franchisor refuses to consent, then the transaction cannot close. These Conditions to Closing are common in a sign-then-close deal, where signing the APA does not mean that the deal is closed.

Articles IV and V: Representations and Warranties of the Seller and Buyer

These Articles contain representations and warranties that the Seller makes to the Buyer, and vice versa. Representations and warranties are promises that a party makes about itself, the business and the assets. These promises by the Seller are what induce the Buyer to purchase the assets. In large deals, the reps and warranties can cover dozens of pages. In smaller deals, the attorneys can often trim down the provisions in this Article, but odds are high that no matter the purchase price, you’ll still have a large number of representations and warranties that the Seller is asked to make.

It is crucial for the Seller to read these reps and warranties closely, because if the Seller makes a representation in the APA that ends up being untrue, the Seller will be at a high risk of a lawsuit from the Buyer seeking Indemnification. If Seller needs to clarify or limit a representation, it usually does so by making a written Disclosureto the Buyer. These Disclosures are typically attached to the end of the APA and referred to as the Disclosure Schedules.

The Buyer also makes representations and warranties; however, these are much more limited in scope. Why? The Seller is transferring Assets to the Buyer, and the Buyer understandably has numerous concerns that the Assets are in good condition, not serving as collateral, not the subject of a lawsuit, etc. In contrast, the Buyer is transferring cash to the Seller, and cash is free of these concerns.

Article VI: Other Covenants

Here, the parties include other mini-agreements that are connected to the APA. For example, the Seller and its owners may covenant, or promise, not to compete against the business for a period of years after Closing. Similarly, the Seller’s owners may agree to serve as a consultant for a short period of time in order to facilitate the transition of the Assets from the Seller to the Buyer. The specific covenants contained in this Article vary widely based on the size of the transaction and the type of business being acquired.

Article VII: Indemnification

Indemnification is a promise by Party A to pay Party B a certain amount if Party A breaches a term of the APA or makes a false representation or warranty. Essentially, Party A agrees to pay Party B a sum of money necessary to make Party B whole for the losses or damages it suffered as a result of Party A’s breach. Indemnification language can be simple or complex, and is often thoroughly negotiated between the Buyer and Seller. It is usually, but not always, mutual, in that each party agrees to indemnify the other.

Article VIII: Miscellaneous Provisions

This is the Article where the lawyers stuff all the boilerplate language. While many of these provisions are uncontroversial, there are a few important deal points, such as choice of law (which jurisdiction’s law will be applied to the APA) and venue (the place where a lawsuit concerning the APA must be brought).

Every Asset Purchase Agreement is going to be unique, because every business, buyer, seller, transaction and attorney is unique. But this should give you a general understanding of the types of details contained in most APAs. Whether you’re buying or selling a business, I believe it’s critical for both parties in a deal to have a good transaction attorney drafting and reviewing the documents required to successfully close a business acquisition.

Thanks to Bill Ouska with Plunk Smith, PLLC in Frisco for providing this article. For more about Bill or to contact him with questions, please visit

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