After kicking off the acquisition negotiation process with a letter of intent (LOI), you and the other party will codify the final terms in an asset purchase agreement (APA).
An APA is a legally-binding contract between a buyer and seller that finalizes the terms and conditions of an acquisition. While you signed off on non-binding terms in the LOI, an APA contains enforceable obligations requiring you to hold up your end of the deal.
We’ve built an all-in-one guide to help you understand everything you must know about asset purchase agreements and how they work. Apply this knowledge to your acquisition, and you’ll walk away happy.
What Is an Asset Purchase Agreement?
An asset purchase agreement concludes acquisition negotiations by codifying the terms upon which you and the other party agreed. You’ll outline key details like the purchase price, escrow terms, indemnification, and more using clear, concise language to bind both parties.
What Is the Purpose of an Asset Purchase Agreement?
APAs bind the buyer and seller to the terms of the acquisition. Say you’re selling a SaaS business. You promise to transfer assets like employees, domains, code, and other intellectual property. If you’re a buyer, you agree to pay the purchase price by a specified date.
Putting these details in writing commits and legally binds both parties.
Buyers and sellers also use APAs to confirm the finer details of the sale. Perhaps the buyer doesn’t want every asset and negotiates for a select few. Or maybe the seller wants to pass off certain liabilities to the buyer. By hashing out the points in an APA, you confirm each detail so that everyone knows what they’re responsible for after the deal closes.
How Does an Asset Purchase Agreement Work?
You draft the APA after both parties sign the LOI, which ensures everyone’s on the same page and kicks off the negotiation process. Better to agree on preliminary details before signing a binding contract.
With Acquire.com’s free LOI Builder, you can draft an offer in less than five minutes, sign it, and upload those terms to a new binding contract with our APA Builder.
Who Prepares the Asset Purchase Agreement?
The buyer traditionally prepares the first draft of the asset purchase agreement and sends it to the seller. After the seller reviews it with legal counsel, they can either accept the terms or counter them with revisions.
Doesn’t most deal-making happen during LOI negotiations? Yes, but the occasional issue can pop up during due diligence. If acquiring a SaaS business, watch for these red flags as you evaluate a startup’s cap table, equity grants, disputes, and more. After clearing up any due diligence problems, ask an attorney to review the document and formalize the deal.
Not using Acquire.com’s free template or APA builder? Talk to an attorney about drafting and reviewing your asset purchase agreement to formalize the deal.
What Must You Include in an Asset Purchase Agreement?
APAs contain more definitive terms than the LOI, so ensure you have all this information ready before drafting. [If you’re an Acquire.com customer, you can skip to the next section to learn about using our Builder to draft your APA.]
- Party information. Include the full legal names of the business, buyer, and seller in the opening paragraph.
- Definitions. Define all unique terms or abbreviations used throughout the agreement, including specific assets.
- Purchase price. How much will you pay, what are the payment terms, and how are you allocating the price? Answer these questions and specify if you’ll take on any liabilities from the seller.
- Purchased assets. Specify which assets you’re acquiring and consider including an appendix listing each item under those asset categories.
- Representations and warranties. To hold sellers accountable, buyers include representations (fact statements) and warranties (promises that the statements are true) in their APAs. If the business doesn’t live up to the seller’s promises, warranties let buyers take legal action in the event of a loss.
- Dispute Resolution. Stipulate what happens if there is a dispute over the APA and how the parties will resolve it.
- Indemnification. If one party does breach the contract, indemnification protects the other. It states that the offending party will compensate for financial damages such as lawyer and court fees.
- Closing conditions. The closing conditions section covers any unique requirements or agreements like non-disclosure agreements. This is where you discuss contingencies and clarify what the buyer and seller must do to complete the transaction.
How to Draft an Asset Purchase Agreement With Our APA Builder
Instead of spending hours or days drafting the first iteration of your asset purchase agreement, use Acquire.com’s free APA Builder to do it in minutes. Our Builder takes the standard legal wording in APAs and combines it with information from your LOI (and any added closing conditions) to create a customized APA. You can download and review the document before sending it to the seller.
To use our APA Builder for your acquisition, follow these steps:
- List your purchase price and payment terms. You can pay all cash at closing or add payment terms such as seller holdbacks.
- Specify your closing conditions. If it helps your acquisition goals, you can opt-in to two closing conditions on our APA Builder: post-closing transition services from existing employees and non-competition and non-solicitation agreements from the seller and key employees. These conditions protect you and ensure a smooth company transition. If you’d like to address other terms, select our third option for Additional Closing Conditions.
- Add any additional terms. The APA Builder pulls through additional terms from your LOI or you can update them here.
- Select your escrow conditions. Using an escrow service protects you while closing the transaction. Instead of handing money over to a stranger, buyers entrust it to the escrow service, which won’t release the funds until the buyer receives and approves the promised assets. Sellers will also know that the buyer paid all the funds before handing over valuable assets. On our APA Builder, you can choose whether or not to use an escrow service and determine who will pay the fees. The buyer or seller can pay the full amount, or you can split it 50/50.
- Choose the assets you’re acquiring. Our APA Builder pre-fills the assets from the seller’s listing, but if you’re acquiring more or fewer than those listed, click Edit Assets.
- Review your APA. Before sending your APA to the seller, check the terms and edit them as needed under each section. You can also download a PDF of your APA to review with your legal counsel.
- Sign and send to the seller. Satisfied with the document? Sign the APA and send it with a message to the seller. Say something like, “Hi Lenny, here are the terms of our deal. Looking forward to closing!”
- Prepare for suggested revisions. The seller can only reject or accept the APA. If they reject it, they’ll send you new terms via email, direct message, or phone to continue the negotiations. Copy the agreed-upon changes into a new APA and send it to the seller.
For more information about the APA Builder, check out our Help Desk.
What Happens After You Sign an Asset Purchase Agreement?
Congrats! You’ve signed the APA and are itching to move forward with the acquisition – what’s next? Now, you move into escrow through Escrow.com. An escrow service protects you from potentially shady online transactions, keeping the money (and assets) safe until the deal closes.
Once the seller transfers the assets described in the APA, the escrow service releases the money into the seller’s account. Bada bing, bada boom, acquisition complete.
How Is an Asset Purchase Taxed?
An asset purchase (or asset sale) is when a buyer purchases the assets owned by the selling entity. After signing the APA, the seller’s business entity transfers ownership of its assets to the buyer’s entity, while the seller retains legal ownership of the surviving entity. Generally, the seller’s surviving entity will be “empty” and will typically wind down since it no longer serves any purpose. Sometimes, it will exist just to receive earnout payments or fulfill tax stipulations.
Instead of taxing the entities in an asset sale, the IRS taxes each asset individually. Tangible assets (physical items like equipment or inventory) are taxed at a long-term capital gains tax rate if the seller has owned them for more than 12 months. Per the IRS, you can face up to a 20 percent tax rate for long-term capital gains.
Any tangible assets held for less than a year or intangible assets (non-physical but valuable items like copyrights or trademarks) are taxed at ordinary income tax rates up to 37 percent.
To learn more about reducing your taxes after an acquisition, check out this guide.
Is an Asset Purchase Agreement Binding?
Yes, an asset purchase agreement is legally binding. The document contains enforceable obligations that require both parties to carry out the APA’s terms and conditions. Pay attention to the wording of your APA to understand the penalties for reneging on those terms.
Is There Goodwill in an Asset Purchase Agreement?
Yes, goodwill is included in an asset purchase agreement. Goodwill is a non-quantifiable, intangible asset that contributes value through brand reputation, customer loyalty, and other future benefits.
In acquisitions, goodwill is the amount of the purchase price beyond the net fair market value (FMV) of a company’s assets and liabilities. See the formula below to calculate goodwill for your startup.
Imagine a buyer acquires a SaaS company for $500,000. If the company’s assets equal $300,000 and its liabilities equal $50,000, goodwill would equal $250,000 (500,000 – (300,000-50,000)).
What Happens to Employees in an Asset Purchase Agreement?
Ultimately, the buyer decides whether to keep existing employees or let them go. As a seller, you’re obligated to pay out terminated employees’ entitlements, including outstanding wages, untaken PTO, unpaid commissions, termination notice pay, and more.
Buyers who decide to keep your employees must transfer them to the new company entity. To do that, most buyers will terminate the employees and rehire them, which causes the seller to pay employee entitlements for their brief period of unemployment.
What Happens to a 401k Plan in an Asset Sale?
Since the seller still owns the business’s original entity (surviving entity) after an asset sale, they’re often responsible for maintaining or terminating a 401k plan for employees. However, a few factors affect what the seller does to maintain or terminate the retirement plan post-acquisition.
If the seller terminates 20 percent or more of their workforce in preparation for the sale, they must arrange for those employees to become 100 percent vested per the IRS partial plan termination rules. A seller who decides to eliminate the plan must file the correct paperwork with the IRS and distribute the remaining assets in the 401k to employees.
In acquisitions where the buyer hires a substantial number of the startup’s existing employees, they sometimes agree to take on a business’s 401k plan. The buyer can either maintain the current plan or merge the 401k into the buyer’s existing retirement plan.
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