Last Updated on February 20, 2023 by lukesguide
Buying or selling an online business is not without risk and it is important that the correct legal documentation is in place so that the interests of the buyer and seller are protected.
One of the must-have legal documents that you will come across when buying or selling an online business is an Asset Purchase Agreement.
In this article, we will explain what an Asset Purchase Agreement is, why they are important and what are some of the key terms that you should have a basic understanding of before signing on the dotted line.
What Is An Asset Purchase Agreement?
An Asset Purchase Agreement is a legally binding, written contract between a buyer and a seller which sets out the terms that govern the sale and purchase of a business and its assets, and the assumption of any liabilities.
An asset sale and purchase should be distinguished from a share, stock, or company sale and purchase. These types of transactions are documented by a stock purchase agreement.
An asset sale and purchase typically involves a seller agreeing to sell all, or only specific, assets of the business, including:
- the tangible assets of a business (e.g. inventory, plant and equipment, office equipment, etc); and
- the intangible assets of the business (e.g. goodwill, intellectual property, domain, and admin accounts of the business).
Whereas a share, stock, or company sale and purchase in accordance with a Stock or Share Purchase Agreement will involve the sale of the entity (i.e. a company) that holds the assets of the business.
It is important to understand the difference between the two transaction types as the legal documentation that formalizes the terms of the transaction will differ in the way that they are drafted.
Why Is An Asset Purchase Agreement Important?
Having a written record of the agreed terms of an asset purchase, such as an Asset Purchase Agreement, is critical as it provides clarity and certain protections for both parties.
Without an Asset Purchase Agreement, it will be difficult for the parties to know what assets and liabilities of the business will be transferred to the buyer at completion.
When drafted correctly, Asset Purchase Agreements will accurately document the rights, responsibilities, and obligations of both parties so that there is no confusion.
In most cases, clearly documented sale and purchase terms that the parties agree to will help make the whole asset sale process go much smoother.
A well-drafted Asset Purchase Agreement is also very important because it is usually the first reference point for the parties (and the courts) in the event of a misunderstanding or dispute.
What Are The Key Terms Of An Asset Purchase Agreement?
Every Asset Purchase Agreement is different but there are some common terms and clauses that you will find in almost every Asset Purchase Agreement.
We summarize below what should be included in an asset purchase agreement.
While they are not part of the operative provisions of a contract and are not legally binding on their own, the recitals of an agreement are helpful in providing the background facts and useful context of an asset purchase arrangement.
The recitals will usually include a summary of what the contract is for, who the parties are the intentions of the parties when entering into the agreement.
Sale and Purchase
Asset Purchase Agreements always include an operative sale and purchase clause. The sale and purchase clause is usually short and simple but sets out the core rights and obligations of both parties under the agreement.
For example, a sale and purchase clause in an Asset Purchase Agreement will state that the seller agrees to sell and the buyer agrees to purchase, the business and the assets, free from any encumbrance, for the purchase price.
The clause in an Asset Purchase Agreement setting out the terms relating to the payment of consideration (i.e. the purchase price) is usually of great interest to a seller.
This clause will typically include information about the consideration payable (i.e. the fair market value) by the buyer to the seller including:
- the amount to be paid;
- how it must be paid (i.e. cash, cheque, bank transfer);
- when it must be paid; and
- whether there are any contingent or deferred amounts to be paid (i.e. earn-out).
Representations and Warranties
The representations and warranties clause in an Asset Purchase Agreement includes important factual statements (usually in the form of a promise or assurance) that are given by the buyer and the seller to one another.
In their most basic form, both parties will represent and warrant that they have the power and authority to go through with the sale and purchase of the business and the assets.
A buyer will usually want a warranty from the seller that the seller legally owns the business and assets that it is selling to the buyer and that the assets are free of any encumbrances, liens, or claims.
Put simply, an indemnity is a promise given by one party to the other party (the claimant), to reimburse the claimant for any loss suffered as a result of certain circumstances arising.
For example, if a seller has breached the intellectual property rights of a third party in the conduct of the business, the buyer of the business can insist that the seller indemnifies the buyer against any loss the buyer suffers after it purchases the business as a result of a claim made by a third party.
Before signing any agreement, it is important to understand any indemnification provision included and how it operates in the event of a claim.
Asset Purchase Agreements will usually include a clause that sets out the termination rights of each party. For example, if the buyer fails to pay the purchase price for the assets by a certain date, the vendor may have the right to terminate the agreement.
A termination clause may also set out any specific rights or obligations that are triggered in the event of a termination of the contract. For example, there may be a break fee or termination fee payable by the buyer if the termination of the contract is a result of an action or inaction of the buyer.
Most Asset Purchase Agreements will include details of the dispute resolution process in circumstances where there is a misunderstanding between the parties.
This clause will usually set out details such as the forum in which disputes will be heard (i.e. litigation or arbitration), any critical time period that must be met by the parties, and details about who bears the cost of a dispute that arises (e.g. costs may be shared equally between the parties or it may be the at-fault party that bears the entire cost).
The governing law under an agreement can often be overlooked but it is very important.
While the Asset Purchase Agreement sets out the terms on which the buyer and seller will conduct the sale and purchase of the assets, the interpretation of those terms may vary depending on which country’s laws govern the terms of the contract.
The parties under the Asset Purchase Agreement must agree to the governing law under the agreement and this choice is expressed in the governing law clause.
Buying or selling an online business can be a very rewarding experience, but a lot can go wrong if you don’t have the right legal documentation in place from the beginning.
At the very least you should have an Asset Purchase Agreement in place when buying or selling an online business.
If the value of the business you are buying or selling is substantial, hiring a good lawyer from a reputable firm and tax advisor with experience in advising clients on the sale and purchase of online business assets can be worth their weight in gold.
They can guide you through the terms of an Asset Purchase Agreement and help you understand your rights and obligations under the agreement.
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