An asset purchase agreement is a contract that details the terms for purchasing assets from another business while limiting liability for the seller’s debts and claiming certain tax advantages. It can be a complex transaction for which a business owner needs solid legal advice, to shield them from unintended consequences.
Finding a qualified business attorney to examine contracts and advise on acquisitions is critical to the success of most enterprises. Partnering with an attorney can save a business significant time and stress when drawing up contracts and discerning the pros and cons of taking certain actions.
How an APA Can Work for Your Business
When your business is on the upswing, growing and expanding, another business may be selling assets through Chapter 11. If their assets meet your needs, it’s possible to pick up key items for short money. But this is a situation of “buyer beware” because those assets can come with unpleasant surprises.
Typical business assets sold through APAs:
- property,
- equipment,
- contracts,
- customer lists,
- intellectual property
- inventory
Business assets can include liabilities, such as liens that transfer with ownership. By using an APA, you may carve out terms of a purchase deal with great specificity. An APA allows the buyer to cherry pick assets they want and avoid those that they don’t want.
Other advantages of an APA include:
- Tax advantages. A carefully crafted purchase agreement may allow a tax basis step up. This means the recorded price of the acquired assets can be the original purchase price, which rewards the new buyer with larger depreciation/amortization deductions.
- Flexibility. Negotiations with the seller determine which assets will change hands, whether any debts are assumed, and when the deal closes.
- Liability mitigation. Acquiring assets can also mean inheriting things like lawsuits and tax obligations unless there’s an explicit indemnification clause.
Structuring an APA correctly is key to it standing up against legal challenges. Be sure that your version includes the following:
- Names and basic information about both buyer and seller.
- Specific information about the assets being sold as well as assets not included in the sale.
- Assumed liabilities. In negotiations with the seller, the buyer may agree to some liabilities when taking ownership of an asset. These can include things like leases, contracts, and even paying the seller’s taxes.
- Purchase price and payment terms. Details of the purchase, including things like funds held in escrow, earn-out, and installment payments.
- Warranties and condition. Details of the goods changing hands, including any warranties included by the seller.
- Closing Conditions. A breakdown of the steps and permissions that must take place, such as regulatory approval, license transfers, and due diligence.
- Post-closing covenants. How the agreement stretches into the future, with things like non-competition agreements, employee transfers, and transitional services.
- Purchase price allocation. For tax purposes, the buyer and seller should describe how the purchase funds are applied among the assets acquired.
In Florida, there are specific concerns for:
- Making sure that corporate bylaws or LLC operating agreements are followed when “substantially all” of a business is sold. This means that corporate boards or partners are dually notified and the business’s governance rules are followed for the transaction.
- Extra attention should be paid to transfers of real property, assignment of licenses or permits, franchise agreements, or other regulatory consents due to nuances of state law.
- Beware of double taxation issues, particularly for C-Corporations in Florida. Consult a tax specialist on ways to avoid this issue.
Consult an APA Expert Before Buying
Some business transactions can be completed without an attorney, but in a complex purchase of assets that may be liened or encumbered by contracts, particularly in a Chapter 11 bankruptcy, there’s no substitution for experienced counsel from WKFK Law. Call for a consultation today.