Martin owns and operates a company that designs, manufactures, and sells widgets. Sales are good, but Martin wants to expand. Research and development of new widget-related products could be expensive, time-consuming, and not particularly productive, so he explores other means of expansion. He finds a company with a gadget division that meets his desire to expand. Martin and the other company owner might use an asset purchase agreement to make the transaction a reality.
What is it about the asset purchase agreement that could help Martin with his product expansion project?
Asset Purchase Agreement Fundamentals
An asset purchase agreement is aptly named – it’s designed to finalize a transaction between someone who is buying business assets and the person or entity selling them. Asset purchase agreements may also be used when companies want to engage in a joint venture while keeping their individual identities.
Business assets included in an asset purchase agreement can be tangible or intangible, like:
- Goodwill with customers and vendors.
- Real property, including business premises and manufacturing facilities.
- Inventory and equipment.
- Intellectual property.
- Stocks and shares.
- Contracts between the seller and other entities.
Some business assets are more complicated to transfer than others. For example, a seller might want to sell real estate that has liens or encumbrances on it. Contracts made by the seller might need to be assigned to the buyer or renegotiated. These details and more must be included in the asset purchase agreement.
The asset purchase agreement gives both parties a certain amount of flexibility. The seller may want to hold on to most of its company while only selling part. Purchasers (like Martin) may not be interested in the entire company but just part of it.
Common Provisions and Why They Are There
Some terms and provisions are common among asset purchase agreements, including:
- Identification of the parties involved,
- Purchase price,
- How and when the purchase price will be paid,
- Financing arrangements,
- Any relevant warranties and representations of the seller and the buyer,
- Detailed descriptions of assets included in the sale,
- Definitions related to the interpretation of the agreement,
- Any liens and encumbrances on the property,
- Jurisdiction and arbitration,
- Potential indemnification,
- Post-closing obligations like non-competes, and
- Terms and conditions related to closing.
The asset purchase agreement might have a number of attachments. For example, there may be schedules of liabilities and real property descriptions.
Using Asset Purchase Agreements for Expansion
We used one example in the introduction to this article. Martin wanted to expand his company and did so by purchasing part of another company.
Why didn’t Martin buy the entire company?
He really only needed the gadget division, a manufacturing facility, and contracts with suppliers and clients. Buying all of the company’s assets might have resulted in overexpansion that was more detrimental than profitable. Also, the seller was able to divest itself of a division that might not be part of its current strategic planning.
Martin and the seller used a properly-drafted asset purchase agreement, one that was written and reviewed by their business lawyers. By doing so, they were more likely to avoid any catastrophic misunderstandings that could have landed them in hotly-contested business litigation.
We Can Assist with Your Asset Purchase Agreements.
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with business and litigation matters. As always, Our Goal Is to Help You Succeed™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.