Running a business is worthwhile, but at one point or another, the owner might need to sell its assets. There are various reasons why people sell their assets, including poor performance, need for money, or capitalizing on value. This is also a resource of revival to the economy by handing the business to another party. The purchase of assets requires formal documenting as a shred of legal evidence.
In this article, we will discuss how to prepare an asset purchase agreement and what are the key points that should be composed for making it credible.
What is an Asset Purchase Agreement?
Rather than buying all of the property or any business of the seller, people often prefer to buy certain assets that they actually need. An asset purchase agreement takes place when the buyer decides to buy certain assets and liabilities. In this purchase agreement, the buyer can specify the liabilities of his assets and leave other liabilities behind.
This agreement allows the parties to negotiate about pre-assumed liabilities of the purchaser and enables transactions where specific assets are transferred.
If the purchase price has exceeded the aggregate tax basis of the acquired assets, the buyer will receive a step-up basis in assets equal to the purchase price. An asset purchase involves purchasing any company's assets. These assets can be vehicles, equipment, jewelry, accounts payable, and receivable.
In a simple assets purchase agreement, a minority shareholder who has not agreed to sell their shares is effectively forced to accept the terms of an asset sale. The buyer is not entitled to step into the complications of approving his purchase for minority shareholders.
In a business asset purchase agreement, the seller has a higher tax cost, so the purchaser insists on paying a higher price for acquired assets. Provisions of an asset purchase agreement can include monthly installments, liens, and conditions precedent for the termination.
The Typical Format of an Asset Purchase Agreement Include
As the asset purchase agreement form holds credibility in legal matters, it is essential to follow the format of the agreement and the compulsory points in it. The following pointers shall recognize the typical format of an asset purchase agreement.
- Purchase Price: The payable purchase price of the assets is mentioned in the agreement. The amount shall be transferred through a bank or telegraphic transfer. The seller typically notifies the way to transfer money five days before terminating the agreement. Apart from the actual price of assets, no other tax or conveyance charges are paid by the purchaser.
- Representation and Warranties: The purchaser accepts that all the important terms and conditions and will remain obligatory till the closing date. On the other side, the buyer also makes sure that the written statements are true.
- Indemnification: The seller will agree to provide security to the purchaser and compensate in case of any loss. Both parties will contact each other if any change is required. The changes will be carried in a faithful manner. If any third party claims the ownership of assets, the indemnifying party shall be noticed and take good charge of the situation.
In case the indemnified party disputes case, the indemnifying party shall apply to the court for payment or deduction without making any prejudgements.
Tips for Writing an Asset Purchase Agreement
After making a deal of purchasing assets, you need to make a formal deal in a proper manner. You need to make sure that relevant regulations and conditions are mentioned in your agreement. The following elements shall explain how to write an asset purchase agreement with perfection.
- Letter of Intent: The asset purchase and sale agreement should present the price and terms on which both buyer and seller have agreed. The agreement shall remain confidential. It should allow the buyer to investigate the asset-seller by his lawyer and other relevant parties.
- Due Diligence: This is the investigation part of the agreement. In accordance with the document, the buyer should be given permission to seller's records, contracts, and employees. Similarly, the seller should be given access to the buyer's reputation, credit card details, and plans for his business.
- Purchase Agreement: The lawyer should then create a detailed purchase agreement. The initial sections will be drafted, and most importantly, the sections of seller and buyer’s interest would be taken into consideration. The purchase price of assets should be written for tax purposes.
- Compliance with State Law: State laws need to be acknowledged while writing the agreement. It may include notifying the company's director, taking votes from corporate shareholders, and protecting the rights of minority stockholders.
Common Mistakes to Avoid When Drafting an Asset Purchase Agreement
While writing the agreement, it is necessary to follow the regulations to protect their rights and interests. However, there are some common mistakes that should be avoided while writing an asset purchase agreement.
- Dealing with the Wrong Person: The well-drafted purchase agreement is of no use if you have done a deal with the wrong and fraudulent person. Therefore, due diligence is required by both parties. The buyer and seller should review the reputation of each other. Both parties should interview each other before signing the agreement and should keep a check on the contracts and credit card details of each other.
- Failure to Specify the Longstop Date of Agreement: Longstop date allows both buyers and sellers to exit if the delay becomes unnecessary and unsuitable to them. It sometimes happens that the deal between both parties can be delayed. In such a condition, it is necessary to mention the longstop date.
- Failure to Specify Closing Requirement: An asset purchase agreement should stipulate the detailed actions that are required and documents to be submitted after the closing of the agreement. It may include the change in bank and signatories, accounts of buyer and seller, and financial records of the purchaser should be mentioned.
The article has concluded a detailed analysis of the purchase agreement sample and the common elements that are needed to be listed while writing the agreement. Several significant tips for writing an efficient asset purchase agreement template have been taken into consideration within the discussion of the article.