Demystifying Asset Purchase Agreements

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Hello, I’m John Montague, and for over a decade, I’ve been involved in asset deals, applying the knowledge gained from my time at UF Law School + over 10 years of deal experience. The goal of this guide is to elucidate the complexities of asset purchase agreements to help you understand and navigate these legal documents more effectively. I had the opportunity as well to work in Biglaw at Locke Lord in which I was able to further hone my skills

Introduction to Asset Purchase Agreements

At the heart of any asset acquisition transaction lies the Asset Purchase Agreement (APA). This pivotal document dictates the specifics of what’s being sold, the process of sale, and the parties’ liabilities and obligations. Although each deal carries its unique characteristics, the foundational structure and key provisions of APAs remain consistent. This guide aims to unveil these elements to enhance your understanding.

Diving Deeper: Understanding Key Components


The preamble acts as the formal introduction to the agreement, dating and defining the document while also introducing and defining the involved parties. Details about the type of entity and the place of formation for non-individual parties are also specified in this section.


Recitals offer a backdrop to the deal by providing essential context and background information. This section can also clarify related transactions or other relevant information that is instrumental to the understanding of the deal.


To ensure clarity and structural simplicity, definitions are typically consolidated in a separate section. This way, each term doesn’t need to be explained when first used, making the review of the agreement terms easier. For instance, the term “purchased assets” can be defined as each of the individual assets being acquired. While some terms merely identify abbreviations, others that impact operative provisions of the agreement are often the subject of negotiation.

Purchase and Sale

The core of the agreement is the Purchase and Sale section, where the parties agree to buy and sell certain assets and assume certain liabilities. The purchase price for the assets, the payment mechanism and timeline, and the form of consideration (cash, promissory note, stock, or a combination) are typically stated here. As the type of consideration paid can have tax implications, it’s crucial for the parties to consult with a tax specialist.

Purchased Assets

In most asset acquisitions, the buyer only acquires the assets and liabilities explicitly identified and agreed upon. This contrasts with a stock acquisition or merger where the buyer inherits all the assets and liabilities of the target company, including unknown or undisclosed liabilities. The assets are typically identified either by a comprehensive list or a statement that all assets are being acquired, barring those specifically excluded. Liabilities are usually identified in the same manner.

Transfer: Mechanics and Considerations

The APA also outlines how various assets are to be transferred and the obligations of the parties pre and post-closing to perfect transfers and facilitate the smooth transition of the business. There may be additional provisions to deal with situations where certain assets cannot be assigned at closing, often due to delayed third-party consents. The seller typically agrees to license or lease these assets (or assign the benefits of the assets) to the buyer until a full transfer can be finalized.

Allocation of Purchase Price

The Asset Purchase Agreement stipulates how the purchase price and certain other costs are divided among the assets for tax purposes. Here, sellers generally lean towards allocations to assets generating capital gain, which might be taxed at a preferential rate. In contrast, buyers favor allocations to assets producing depreciation and amortization deductions, which can offset income.

Typically, the parties agree to a schedule detailing the methodology for allocating the purchase price and certain other costs among the assets. The allocation is often delivered pre-closing, at closing, or 30 to 90 days post-closing.

Purchase Price Adjustments and Earn-Outs

Purchase Price Adjustments

The purchase price may be fixed or subject to adjustment. This mechanism ensures the value of the assets is accurately represented on the closing date. Adjustments can increase or decrease the purchase price after a thorough review of specially prepared financial statements or specific assets. The most common adjustments are based on balance sheets, profit and loss statements, the valuation of specific assets (like inventory or accounts receivable), or levels of cash and debt.

The purchase price adjustment provision usually includes a mechanism for preparing and reviewing the final financial information, dispute resolution procedures, and the allocation of expenses.


In situations where the buyer is acquiring assets constituting a business, future performance of the business might influence part of the purchase price. Earn-outs are common when the buyer and seller cannot agree on the value of the target business. In this case, part of the purchase price is paid at closing, and the rest is paid in stages if the business meets certain financial or operational targets. As the structure of an earn-out can impact taxation, parties should consult a tax specialist when drafting this provision.


The purchase price might be paid entirely at closing, or a portion may be held in escrow. This arrangement ensures potential purchase price adjustments favoring the buyer or indemnification obligations of the seller. The escrow is often released to the seller either in a lump sum at the end of an agreed period or in stages. Alternatively, the buyer can withhold a portion of the purchase price for a certain period, known as a holdback.

Closing Mechanics

This provision details the closing date, location, and payment method for the purchase price. Despite many closings being virtual with signature pages exchanged via email, the agreement usually specifies a physical location for the closing, often at the offices of the buyer’s or seller’s attorneys.

Representations and Warranties

Representations and warranties are factual assertions and guarantees made by the parties involved. They often form a significant part of the asset purchase agreement and can be time-consuming to negotiate, particularly those from the seller. These statements serve to disclose crucial information about the parties and the assets sold, allocate risk, form the basis for an indemnification claim in case of a breach, and influence a party’s commitment to close the transaction or right to terminate the agreement before closing.

Limitations of Representations and Warranties

These can be limited in several ways:

  1. Materiality: A statement can be qualified by what is substantial or what could cause a significant adverse effect.
  2. Knowledge: A statement can be qualified by what a party knows or should know.
  3. Range: A statement can be limited to certain materials.
  4. Time: A statement can be made as of a specific date or time.
  5. Scheduled information: A statement can be limited by reference to the disclosure schedules.

Seller’s Representations and Warranties

The seller’s representations and warranties are usually more extensive than the buyer’s. These statements provide important facts and promises about the seller, the assets being sold, and the seller’s right to sell those assets. The extent of these representations and warranties can vary, depending on the range of assets being purchased and the level of risk accepted by the parties.

Buyer’s Representations and Warranties

The buyer’s representations and warranties aim to reassure the seller that the buyer is capable of completing the transaction, both legally and financially. If the buyer is offering stock as part or all of the consideration, the seller will likely demand more detailed representations and warranties.

Closing Conditions

If there is a period between signing and closing, each party will require the other to meet certain conditions before the transaction can be finalized. These conditions may be legal requirements, such as obtaining governmental approval, or they may be designed to distribute risk between the parties.

Common Closing Conditions

These include obtaining necessary government approvals, ensuring there are no legal constraints on the transaction, confirming the accuracy of representations and warranties, compliance with all pre-closing covenants, receipt of required documents and instruments, and ensuring no significant adverse changes in the target business.

Bring Down

In cases where signing and closing don’t occur on the same day, the buyer often requires that the representations and warranties are reaffirmed at closing to ensure their continued accuracy. If these are not accurate at closing, the buyer usually has the option not to continue with the transaction. This requirement, known as the ‘bring down’, is often qualified by what could cause a significant adverse effect. Although this mainly benefits the buyer, both parties typically have a ‘bring down’ condition as part of their closing obligations.

Third Party Consents

Asset acquisitions frequently necessitate multiple third-party consents, particularly when contracts contain clauses preventing assignment. The buyer often stipulates that the seller must acquire certain crucial consents as a condition for closing.


A covenant is a commitment to perform a particular action (known as an affirmative covenant) or to abstain from doing a certain action (referred to as a negative covenant). These covenants can guide the conduct of the parties involved from the signing of the agreement up to the post-closing period.

Pre-Closing Covenants

Pre-closing covenants apply when the signing and closing of an asset purchase cannot occur simultaneously due to factors such as regulatory, financing, or third-party consent issues. When there’s a period between signing and closing, the seller usually provides an interim operating covenant. This covenant outlines specific actions that the seller must take or abstain from before the closing, without the buyer’s consent.

Common interim operating covenants may include:

  • Maintenance of the business’s assets.
  • Avoidance of entering into any long-term or significant contracts.
  • Retention of existing employees and no hiring of new employees.
  • Abstaining from incurring debt.
  • Limiting capital expenditures to a certain amount.

Covenants may also be formulated to ensure the completion of the transaction. These may include:

  • Making every effort to finalize the transaction.
  • No solicitation of other buyers for the assets.
  • Granting the buyer access to the company’s employees and premises.
  • Securing necessary third-party consents.

Post-Closing Covenants

Post-closing covenants apply after the transaction is closed. They’re designed to manage the behavior of the parties after the deal. For instance, both parties may covenant to maintain certain tax and business records related to the assets for a defined period. The buyer might also require the seller to make restrictive covenants regarding their conduct after closing. These can include non-compete or non-solicitation clauses.

The seller may also require post-closing covenants from the buyer, such as providing insurance to the outgoing directors and officers or changing the name of the acquired business.


A termination provision permits parties to end the agreement under specified circumstances. The agreement typically cannot be terminated if the party seeking termination is in breach of their obligations.

Common reasons for termination can include:

  • Failure to obtain regulatory approvals or an issued judgment that prohibits the transaction.
  • The other party’s failure to fulfill their closing conditions.
  • Material breach of the agreement by the other party.
  • The seller’s fiduciary obligation to accept a superior offer from another buyer.
  • Either party can terminate if the transaction hasn’t closed by a specified date.
  • Mutual agreement by both parties to terminate.

Break-Up Fees

Break-up fees are used to compensate the non-breaching party if the deal is terminated. They might be payable if a party fails to fulfill its conditions, accepts an offer from another buyer, or materially breaches the agreement.


Indemnification provides a post-closing remedy for losses incurred under the asset purchase agreement. The obligation to indemnify the other party might arise from a failure to perform a covenant, a breach of a representation or warranty, or an agreed allocation of liabilities.

Specific procedures for indemnification, such as notification and control of litigation, are generally negotiated by the parties. Limitations on indemnification, such as caps and survival periods, may also be included in the agreement.

Representation and Warranty Insurance

Representation and warranty insurance (R&W insurance) provides coverage for indemnification claims a buyer might have for losses resulting from breaches of the seller’s representations. This shifts some of the business risks of an acquisition to an insurance company in return for the policy premium. R&W insurance, if purchased, affects the indemnification provisions and can be obtained by either the buyer or the seller.


The asset purchase agreement usually comprises boilerplate clauses which, despite being standard, can significantly influence the dynamics of the agreement. For instance, if the agreement is non-assignable, the seller may experience administrative difficulties when transferring the assets to another subsidiary before finalizing the deal. Frequently included miscellaneous clauses include entire agreement, assignment, choice of law, dispute resolution, third-party beneficiaries, allocation of expenses, and waiver of compliance with bulk sales laws.

Disclosure Schedules

The disclosure schedules serve as an inventory of exceptions to the representations and warranties and other extensive information. These are integral to the asset purchase agreement as they affect many operative provisions. For instance, if a seller asserts that they are not involved in any legal disputes except as specified on Schedule 3.7, the representation becomes meaningless without reviewing the mentioned schedule. The buyer must validate the schedules based on their due diligence review.


Exhibits in an asset purchase agreement serve to detail and validate the numerous components of the transaction, acting as supporting documentation. They typically encompass a wide range of documents that demonstrate the transfer of various assets and liabilities. These can include bills of sale for tangible assets, which substantiate the transfer of physical items such as machinery or equipment. Assignment and assumption agreements can serve as exhibits to prove the transfer of contracts from the seller to the buyer. Intellectual property assignment agreements might be present to document the transfer of patents, trademarks, copyrights, or other forms of intellectual property. For real estate assets, deeds and property transfer documents may be included to record the transfer of ownership. In some cases, escrow agreements and transition service agreements can also form part of the exhibits, outlining the specifics of the temporary financial arrangement or the process of transferring operational services. Overall, the types and nature of exhibits largely depend on the specifics of the asset purchase transaction.

Transfer Documents

Asset acquisitions usually demand more formalities and paperwork than stock acquisitions and mergers. This is because asset acquisitions necessitate a transfer of each separate asset and liability of the target business. The commonly used documents in asset transfer include bills of sale for tangible assets, assignment and assumption agreements for contracts, IP assignment agreements, and deeds for real property transfer.

Other Ancillary Agreements

The parties may need to enter into other ancillary agreements to tackle arising issues in connection with the transaction. These agreements could include escrow agreements and transition services agreements.

Successor Liability

Generally, the buyer of assets does not assume the liabilities of the seller. However, under certain circumstances, a court may hold a buyer accountable for the seller’s liabilities. Federal law also imposes certain employee pension and environmental liabilities associated with a business to the buyer in an asset acquisition. Some state and local tax laws may hold the buyer accountable for certain seller’s taxes.

Transfer of Certain Assets

Different assets require different formalities and bring different issues when they are transferred in an asset acquisition. The transfer of tangible property is evidenced by a bill of sale. The transfer of contracts is validated by an assignment and assumption agreement. Employee transfers, real property transfers, and intellectual property transfers all have their own specifics and requirements. Also, bulk sales laws apply when transferring a significant portion of the seller’s business or assets.

Key Negotiation Issues

Key negotiation issues in the asset purchase agreement can include key definitions, purchased assets and excluded liabilities, escrow provisions, purchase price adjustments, representations and warranties, closing conditions, covenants, termination, indemnification, and dispute resolution. Each deal may have different issues, but these provisions typically undergo the most negotiation between the buyer and seller.


In conclusion, asset purchase agreements represent a crucial aspect of business transactions and facilitate the seamless transfer of assets between parties. These agreements play a critical role in defining the specifics of the transaction, the assets and liabilities involved, the rights and responsibilities of the parties, and the overall mechanics of the transfer process. They incorporate various components, such as recitals, representations, warranties, covenants, indemnification clauses, and conditions precedent. Additional elements like miscellaneous provisions, disclosure schedules, exhibits, and ancillary agreements add depth and complexity to the agreement. Each part of the asset purchase agreement, whether it’s defining successor liability, dealing with bulk sales laws, or negotiating key issues, significantly influences the overall transaction dynamics. It’s essential to remember that even though these agreements often follow a standardized format, the negotiation process and tailoring to the transaction’s unique needs are vital to protecting the parties’ interests and achieving a successful asset transfer.

Legal Disclaimer

The information provided in this article is for general informational purposes only and should not be construed as legal or tax advice. The content presented is not intended to be a substitute for professional legal, tax, or financial advice, nor should it be relied upon as such. Readers are encouraged to consult with their own attorney, CPA, and tax advisors to obtain specific guidance and advice tailored to their individual circumstances. No responsibility is assumed for any inaccuracies or errors in the information contained herein, and John Montague and Montague Law expressly disclaim any liability for any actions taken or not taken based on the information provided in this article.

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