Asset Purchase Agreements
Contract Types
Asset Purchase Agreements
When a buyer wants to acquire a business without taking on all of its history, an asset purchase agreement is often the preferred structure. Rather than buying the company itself, the buyer selects specific assets to acquire and decides which liabilities, if any, to assume. Defining exactly what is — and is not — included in the transaction is the central challenge of drafting and negotiating an asset purchase agreement.
What This Contract Is
An asset purchase agreement (APA) is a contract in which a buyer acquires specified assets of a business from a seller. The assets may include tangible property such as equipment, inventory, and real estate, as well as intangible assets such as intellectual property, customer contracts, trade names, and goodwill. Unlike a stock purchase, the buyer in an asset transaction does not automatically inherit the seller's liabilities — instead, the agreement specifies which liabilities, if any, the buyer is assuming. This selectivity is one of the primary reasons buyers prefer asset purchases, particularly when the target has unknown or contingent liabilities.
When It's Commonly Used
- •A buyer wants to acquire the operating assets of a business without assuming its pre-existing liabilities.
- •The target company has significant contingent liabilities, litigation exposure, or regulatory issues that the buyer wants to avoid.
- •The transaction involves acquiring a division or product line from a larger company rather than the entire entity.
- •The parties prefer asset-level tax treatment, including the ability to step up the tax basis of acquired assets.
- •The seller is a sole proprietor or partnership that does not have a separate legal entity to sell.
- •The buyer is acquiring specific intellectual property, equipment, or customer relationships rather than an entire business.
- •A business is being acquired out of bankruptcy or a distressed sale, and the buyer wants a clean break from pre-existing claims.
How the Agreement Is Generally Structured
Purchased Assets
A detailed schedule identifying every asset being transferred — equipment, inventory, intellectual property, contracts, permits, customer lists, and other specified property.
Excluded Assets
Assets that are expressly not being transferred, such as cash, certain receivables, personal property of the seller, or assets unrelated to the acquired business.
Assumed Liabilities
The specific liabilities the buyer agrees to take on — typically limited to identified obligations such as post-closing obligations under assumed contracts.
Excluded Liabilities
All liabilities not expressly assumed by the buyer remain with the seller. This is one of the most important sections of an APA and should be drafted carefully.
Purchase Price and Allocation
The total consideration paid and how it is allocated among the acquired assets for tax purposes. Allocation affects the tax treatment for both buyer and seller.
Representations and Warranties
Factual statements by each party about the assets, the business, and the transaction. Seller representations typically cover title to assets, absence of liens, contract status, and intellectual property ownership.
Closing Conditions and Deliverables
What must happen before closing can occur, and what documents and instruments must be delivered at closing to transfer title to the assets.
Post-Closing Obligations
Ongoing obligations after closing, such as transition assistance, non-competition provisions, and indemnification obligations.
Clauses Commonly Found in This Contract
Representations and Warranties
The seller typically represents that it has good title to the assets, that the assets are free of undisclosed liens, that contracts being assigned are in good standing, and that the business has been operated in compliance with applicable law.
Indemnification
Allocates post-closing responsibility for losses. The seller typically indemnifies the buyer for excluded liabilities and breaches of representations; the buyer indemnifies the seller for assumed liabilities and post-closing operations.
Assignment
Many contracts require the counterparty's consent before they can be assigned to a buyer. Identifying which contracts require consent — and obtaining it — is a critical pre-closing task.
Confidentiality
Governs the handling of non-public information about the business exchanged during due diligence and after signing.
Non-Disclosure Agreement
Typically executed at the outset of discussions to protect confidential business information shared during the evaluation process.
Governing Law
Specifies which state's law governs the agreement and where disputes will be resolved.
Severability
Provides that if any provision is found unenforceable, the remainder of the agreement continues in effect.
Entire Agreement
Confirms that the written agreement represents the complete understanding of the parties and supersedes prior negotiations and representations.
What Stewart Law Looks For
- ✓Whether the purchased assets schedule is complete and accurately describes every asset being transferred, including intellectual property, permits, and customer contracts.
- ✓Whether the excluded liabilities provision is broad enough to protect the buyer from pre-closing obligations, including tax liabilities, employment claims, and environmental matters.
- ✓Whether contracts being assigned require third-party consent and whether that consent has been obtained or is a closing condition.
- ✓Whether the purchase price allocation is consistent between buyer and seller and whether it reflects the actual value of the assets being acquired.
- ✓Whether representations about intellectual property ownership, title to assets, and absence of liens are accurate and adequately supported.
- ✓Whether the seller has the authority to sell the assets and whether any approvals — from shareholders, lenders, or regulators — are required.
- ✓Whether post-closing transition obligations are clearly defined and whether the seller is obligated to cooperate in transferring customer relationships and operational knowledge.
- ✓Whether non-competition provisions are appropriately scoped in duration, geography, and subject matter.
Areas That May Deserve Closer Attention
- ⚑A purchased assets schedule that is vague or uses catch-all language without specifically identifying what is being transferred.
- ⚑Assumed liabilities provisions that are broader than the buyer intends — particularly language that could be read to include pre-closing obligations.
- ⚑Contracts that require consent to assignment where consent has not been obtained and is not a closing condition.
- ⚑Representations about intellectual property that have not been verified through a proper IP audit.
- ⚑Purchase price allocation that is inconsistent between the parties' tax filings, which can create IRS scrutiny.
- ⚑A seller that lacks clear title to key assets, such as equipment subject to a lien or intellectual property that was developed by a third party.
- ⚑Transition assistance obligations that are vague or that do not specify duration, scope, or compensation.
- ⚑Non-competition provisions that are so broad they may be difficult to enforce or that unreasonably restrict the seller's future activities.
Party Perspectives
Buyer
- •Wants a comprehensive purchased assets schedule and a narrow assumed liabilities provision.
- •Seeks broad representations about title, liens, contract status, and absence of undisclosed liabilities.
- •Wants consent to assignment obtained for all material contracts before closing.
- •Prefers a purchase price allocation that maximizes the tax basis step-up for depreciable assets.
- •Wants transition assistance from the seller to ensure a smooth handover of operations.
Seller
- •Wants a clear and final list of excluded liabilities to avoid post-closing claims.
- •Seeks to limit representations to matters within actual knowledge and to qualify them with materiality thresholds.
- •Prefers a purchase price allocation that minimizes ordinary income recognition.
- •Wants a clean break at closing with limited post-closing obligations.
- •May resist broad non-competition provisions that restrict future business activities.
Related Contract University Terms
When to Have an Attorney Review It
Asset purchase agreements involve complex issues of asset identification, liability allocation, and contract assignment that benefit from careful legal review. A reviewer should examine the agreement before signing — not just before closing — because the scope of what is being purchased and what liabilities are being assumed is determined at the drafting stage. Transactions involving intellectual property, regulated industries, real estate, or significant employee matters warrant particular attention.
Frequently Asked Questions
Why do buyers often prefer asset purchases over stock purchases?
In an asset purchase, the buyer can select which assets to acquire and which liabilities to assume, leaving pre-existing liabilities with the seller. This is particularly valuable when the target has unknown contingent liabilities, litigation exposure, or regulatory issues. Asset purchases also allow the buyer to step up the tax basis of acquired assets, which can provide depreciation benefits.
What happens to employees in an asset purchase?
Employees of the target company are not automatically transferred in an asset purchase. The buyer typically offers employment to selected employees, who then become employees of the buyer. The agreement should address which employees are being offered positions, how benefits and seniority are treated, and whether the seller has any obligations to employees who are not retained.
What is purchase price allocation, and why does it matter?
Purchase price allocation is the process of assigning the total purchase price among the acquired assets for tax purposes. The allocation affects how the buyer depreciates the assets and how the seller recognizes gain or loss. Buyer and seller often have different tax preferences for allocation, and the IRS requires both parties to report consistently.
What is a bulk sale law, and does it apply to asset purchases?
Bulk sale laws, which exist in some states, require notice to creditors before a business sells substantially all of its assets outside the ordinary course of business. These laws are designed to protect creditors from sellers who might transfer assets and then be unable to pay their debts. Whether bulk sale requirements apply depends on the jurisdiction and the nature of the transaction.
What is a successor liability risk in an asset purchase?
Even in an asset purchase, a buyer may be exposed to certain pre-closing liabilities of the seller under successor liability doctrines. These doctrines vary by state and by the type of liability involved — product liability, environmental claims, and tax obligations are common areas of concern. Careful drafting of the assumed and excluded liabilities provisions, combined with appropriate representations and indemnification, is the primary way to manage this risk.
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