An Asset Purchase Agreement (“APA”) is an agreement that finalises what is to be sold in a commercial business sale between a seller and a buyer. This document crystallises the terms and conditions of the sale. Unlike a Share Purchase Agreement, an APA allows the buyer to acquire certain assets of the business without certain liabilities, as the buyer is able to ‘cherry pick’ the assets that it wants to acquire from the seller. Furthermore, the buyer’s solicitors will usually include warranties to protect their client from unnecessary risks. Consequently, this document tends to favour the buyer as it is able to choose what assets and liabilities it wants to incur.
One of the major benefits of an APA, is that it states in detail what items (tangible or intangible) are being sold by the seller to the buyer. From this, the buyer is able to obtain the assets at fair market value, as the purchase price for the assets are stipulated at the current market value. However, it should be noted that what constitutes fair market value can cause some contention and an asset assessment may need to be conducted by an independent accountant. Thus, an APA is a comprehensive document that provides the buyer with more protection against unwanted liabilities compared to a Share Purchase Assessment.
Nevertheless, it should be noted that even with the benefits, an APA can still have its disadvantages. One of the major disadvantages is that as the buyer is acquiring the seller’s assets directly, the buyer will have to adhere to any rules required to transfer the assets e.g. registering ownership of a property with the Land Registry. Unfortunately, the rules of transferring assets usually involve a third party, and this can delay the completion of the asset sale.
Although the buyer’s solicitor will carry out their due diligence, it is possible that there may be some liabilities that have not been accounted for. Consequently, it is important that the buyer negotiates a fair price for the purchase of the assets, so that any unforeseen liabilities can be covered through the running of the business.
Once the asset sale has been completed, the buyer (as the new owner) may have to pay for the following:
- Payment of Stamp Duty Land Tax (“SDLT”) on transfers involving land.
- Value Added Tax (“VAT”) which is chargeable on the transfer of many business assets.
- The transfer of third party contracts (suppliers) through assignments and novation agreements.
- Employee administration and finances e.g. insurance, payroll, PAYE, VAT and pensions.
In conclusion, before a buyer proceeds to enter an APA, it should seek the involvement of solicitors, accountants and any other experts required to assess the commercial nature of the transaction.
Please contact Lawdit’s commercial department for an initial consultation if you are interested in acquiring a business or any business assets.