Whether you use an LOI or our signature Offer to Purchase form at the start of your business transaction, you’re going to need an Asset Purchase Agreement (APA) to finish it.
Strangely enough, despite the importance of this document, people refuse to engage with attorneys to help draft this document. As we’ve often seen, those who don’t use attorneys to create this document often use attorneys to litigate it after a DIY version. Trust us, the latter is far more expensive.
What is an APA?
An APA takes the broad strokes of an LOI and crystallizes them into the fine print of a legal contract. It details what assets are being purchased and the price to be paid for these assets.
What should an APA cover?
Once you get through the standard opening language of defining and locating the buyer and seller with names and addresses, and language of governing law, severability, etc. as well as defining specific terms that will be used throughout, an APA can cover, but is not limited to:
- Purchase price and payment: how much will be paid over what period of time? Will there be any seller financing? Is there any kind of earnout? Will there be any adjustments to this based on the findings of due diligence?
- Asset identification: what is being purchased? A detailed schedule will need to be created, parsing tangible assets like equipment and inventory from intangibles like customer lists and IP.
- Work in Progress: Who is getting what for work that will be ongoing at the time of the sale? Will the seller receive a percentage for closing the sale and completing some of the necessary work? Will the buyer keep all of the income?
- Working capital: What will be recommended for the new entity to have on hand so that it can seamlessly begin operations on the day of the sale?
- Pro-rata: If property tax has been paid for the year and the sale closes in June, will the buyer rebate 50% of what was paid to the seller?
- Receivables and Floor plan: How will this be divided between buyer and seller?
- Warranties and Representations: What are the representations and warranties of the buyer and the seller?
- Representations are statements of fact made to induce another party to enter an agreement
- Warranties are promises that certain facts are true and offer a form of insurance if those facts turn out to be untrue.
- Covenants: This can include non-competes and ongoing transition support from the seller
- Lease and other liabilities: What liabilities are being assumed by the buyer? A lease is one of the most critical aspects of any deal. This may also include any ongoing litigation.
- Closing date: When will the deal close, and what conditions have to be met in order for the deal to be finalized? (Signing the APA before closing might happen in larger, more complicated transactions to ensure agreement prior to incurring due diligence expense.)
- Dispute resolution: What mechanism (e.g., arbitration) will you use to resolve disputes?
Don’t ChatGPT It
We advocate for using AI in your business (see here) but we don’t advocate for it writing an APA for you, at least not yet. We know these systems will get better and we’d be foolish to predict the future, but for now, in 2025, hire an attorney. Thank us later.
Do you need an attorney to help you draft an APA? We know many reliable ones. Contact us and we’ll connect you.