Anatomy of an Asset Purchase Agreement - Part 2

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Asset Purchase Agreements Demystified

About Asset Purchase Agreements

Asset Purchase Agreements are often long, complicated, and hard to understand. If you learn their common structure, it can be easier to make sense of the parts. This is part two of a three part series about Asset Purchase Agreements (“APA”).

In our previous article, we discussed the first few sections of a typical APA:

  • Definitions
  • Purchased Assets & Purchase Price
  • Closing

This article discusses sections about representations, warranties, and covenants.

Seller Representations & Warranties

This section contains the seller’s statements about the seller’s assets and assurances about the business. Buyers want to know that the seller owns the assets, that the seller has the right to sell them, and that the assets are in good condition. Sellers often want to limit how broad their promises are. This section tends to be one of the most heavily negotiated parts of the APA.

Sellers are often required to make statements about:

  • the history of the business and assets
  • ownership of the assets
  • the condition of the assets
  • legal, environmental, regulatory, and insurance matters affecting the assets
  • contracts governing the assets
  • leases and loans affecting the assets
  • taxes affecting the seller or assets
  • recent changes to the assets

These matters, and many others, are commonly included in the representations and warranties section.

Buyer Representations & Warranties

This section contains the buyer’s statements about its role in the deal. Although the buyer’s representations are usually less comprehensive than the seller’s, buyers are commonly required to make statements about their ability to complete the purchase of the assets.

Covenants

This section contains the promises that the buyer and seller make to each other about the transaction.

“Pre-closing covenants” are promises about how the business will be operated before the closing. They indicate what each party must do to ensure that the transaction is completed. Examples include seller promises to operate the business consistently with past practice, promises to give notice of adverse events, and promises to allow the buyer access to information about the assets.

“Post-closing covenants” are promises about after the closing. Examples include promises about non-competition, confidentiality, and retaining records.

This section is often heavily negotiated.

Conclusion

The next article will discuss the remaining sections of a typical APA.

Asset Purchase Agreements are varied and often complex, but they do share common elements. There is no substitute for legal advice from an experienced acquisitions attorney. That said, you’ll get more out of the legal advice if you have a “big picture” understanding of an Asset Purchase Agreement, which will help you make sense of the parts of it.

Contact us today to discuss your Asset Purchase Agreement.