Four Key Asset Purchase Agreement Checklist

By Drew Stevens - August 3, 2018 - Mergers & Acquisitions

You may be contemplating buying a business, shopping for a complementary subsidiary, or just weighing the pros and cons of a potential M&A deal. One of the core agreements for executing a M&A deal is the asset purchase agreement.

A good asset purchase agreement will address a range of purchase and transition issues, including the following four asset purchase agreement checklist:

1. Structure of the purchase price

There are several key components of the purchase price beyond just the grand total paid for the assets. Of more important are the holdback amount and purchase price adjustments.

The holdback is a certain amount of the purchase price that is retained by the buyer or put in escrow and is usually paid out to the seller after a certain period of time. Depending on how the asset purchase agreement defines the holdback, the holdback can be used for various purchase price adjustments or other post-closing issues that may arise.

Typical purchase price adjustments speak to the financial and operational state of the assets and company when the buyer takes possession. A good asset purchase agreement will contemplate adjustments for closing current assets amounts, closing current liabilities amounts, and the closing net working capital amount.

2. Representations and warranties

The degree of thoroughness of the representations and warranties is crucial to minimizing risk in acquiring assets. The usual, traditional points include corporate authority, legal compliance, accurate financial statements, and (hopefully) a lack of litigation, liens, and encumbrances.

Some representations and warranties may require a higher degree of attention during due diligence. One specific issue is that of “no conflicts”. An asset purchase agreement should include a statement that the contemplated transaction will not trigger any anti-assignment or change of control provisions that may be present in any of the seller’s contracts. Good due diligence will include a review of all material contracts, to assess any implications associated with such clauses.

Creativity and industry specific representations and warranties may also be required. For example, with a manufacturing deal, environmental compliance and clean up may be big ticket items. With telecommunications, provisions related to the FCC and licensing may be warranted (pardon obligatory awful pun).

3. Covenants

There are a variety of covenants that can be addressed in an asset purchase agreement. Typical covenants can require the seller to take general or specific action, like continuing to conduct the business in the ordinary course of operation, maintain inventory at the usual levels, and use reasonable, best, or commercially reasonable efforts to maintain customer, vendor, and employee relationships.

You may also want to contemplate the use of negative covenants. Negative covenants prevent a party from taking a certain action. Examples include preventing the seller from incurring debt up to a certain amount, making any big capital expenditures, or with SaaS, making substantive changes to user features or the platform itself.

4. Clearly addressing purchased assets and excluded assets

Finally, it doesn’t hurt to check one last time that you’re completely comfortable with the scope and breadth of how purchased assets and excluded assets are defined. Nothing makes for closing-time confusion quite like when a seller claims that a key piece of machinery or equipment was not part of a deal.

When it comes to fixtures, equipment, heavy machinery, and specific computer hardware and systems, a high level of detail can eliminate potential issues. Although it can be time consuming, properly documenting makes, models, and serial numbers in attached schedules can save tens of thousands of dollars in the future.

Specific assets that a seller will retain should also be addressed in detail. Specific contracts, tangible assets, and intangible assets that are not a part of the deal should be scheduled out. Call our business contract attorney now.