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Essentials of an Asset Purchase Agreement

By Nevin Clinton

Purchase or sale of assets is a vital part of a plethora of businesses and it is of paramount importance that both parties to such a transaction get fair terms and treatment. Therefore, it is essential that such terms are written down and agreed upon. This is where an asset purchase agreement comes into the picture.

What is an Asset Purchase Agreement?

An asset purchase agreement (hereinafter referred to also as APA) is nothing but an agreement made between a buyer and seller in order to transact on an asset for a fixed price. It must be noted here that an asset purchase agreement is completely different (albeit confused with) from a merger and acquisition transaction. In the latter, there is transfer of all assets concerned whereas in the former it is just a few specified assets that are sold and bought. 

Why is an Asset Purchase Agreement necessary?

An APA is important because it comes with a plethora of advantages that help make the process of transfer of an asset simpler. Clear laying down of the structure and mode of transaction can be laid down and the terms can be made clearer than they would have been in an oral agreement. Problems with the law or with minority shareholders can be avoided as well. Apart from all these, the important fact of the matter is that they help both parties in understanding their roles and in protecting their rights.

Are there any downsides to an Asset Purchase Agreement?

There are a few disadvantages that are associated with an APA despite its aforementioned positive points. For example, there can be higher costs involved especially when a process of retitling of the asset is done. The agreement would need to be reviewed and approved by the concerned authorities and that could be time-consuming. Also, there can be times when an APA is not needed at all and some other legal instrument is required. In such cases, it is necessary to choose the right kind of agreement, failing which, complications could arise. Therefore, it will also be advisable and essential to hire legal personnel to help with drafting and coming up with terms in the agreement.

What are the essentials of an Asset Purchase Agreement?

  • Details on Assets Transferred: An APA must contain the terms concerning the transfer of the asset and how the same must be effected. Royalty fees involved, if any, and other such details must also be mentioned in the agreement.
  • Price: The price of the asset and the mode of payment that would be used must also be stated. 
  • Representation and Warranties: It is important that an assurance is made regarding the quality of the asset, terms of use, risks involved and so on by the seller (representation). If the said assurance turns out to be false, the seller can be held responsible through termination, penalty or litigation and the same must be mentioned in the APA (warranty).
  • Indemnification Clause: It is advisable that an indemnification clause be given in an APA in order to indemnify the buyer in instances like any legal suit, unforeseen losses, fines etc.
  • Termination: Details on how and when the APA can be terminated and cease to exist can also be stated. This can be when there is mutual consent or when terms are breached by either party etc. 
  • Obligations post transfer of asset: The relationship between the buyer and seller does not stop with the transfer of the asset. There are bound to be certain obligations post sale on the part of both parties. This can be elucidated upon in the APA. 
  • Other such details that might be necessary to include in the relevant case.

An APA, according to Blount Law, must have an answer to four of the following: Who? (parties involved), what? (the asset), how? (mode of transfer, payment etc.), what happens after? (post-sale obligations). 

Conclusion

An Asset Purchase Agreement is an efficient way to make the rights and obligations of a buyer and seller clear when an asset is transferred. Notwithstanding the few mentioned disadvantages concerning it, its advantages easily outweigh the same and hence, it is absolutely necessary that in most cases, an APA must be drafted.