Asset Purchase Agreements

An asset purchase agreement is a written contract setting out the assets/ liabilities which one business buys off another business. The assets/ liabilities of a business can include the following: the business name, the goodwill, the intellectual property, the stock, machinery, the service contracts, the premises, creditors, debtors, client database etc etc.

Asset purchase agreements contain the seller’s representations and warranties (some backed by an indemnity). An asset purchase agreement will deal with the seller confirming that it has legal and beneficial ownership of the asset in question, that it is being sold free from any known encumbrances, charges or liens (save those that are disclosed or immediately apparent) and that it is not insolvent. In return a prospective buyer will represent that it is authorised to buy the assets and will often add the caveat that this is subject to contract and it being in a position to obtain the finance. Matters relating to the price, any deposit payable, what the payment terms are, any security offered by the buyer if the payment is to be spread over a period of time etc. What timescales the parties are working to, any finance arrangements, assignments of contracts or whether they will be novated, any restriction on any announcements being made until signing (exchange or completion). This is sometimes difficult if it is a large scale transaction and consents from regulatory authorities or governing bodies is required.

Post sale restrictions/ non-compete provisions is another key area. The buyer may well want to retain certain staff for a period of time. The buyer will not want the seller to poach any clients and/ or compete with the business just sold as this is likely to significantly impact the value of business sold. The seller will want to ensure that such restrictions are fair, reasonable in that they protect the legitimate business interest and do no more than that.

If things do not work out, a well drafted asset purchase agreement should set out a dispute resolution procedure to be adopted by the parties, failing which they can always resort to the courts.

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