Asset purchase agreement explained: the 3 key clauses and how it differs from an SPA

What is an asset purchase agreement, and what are the three clauses you would want in one? An asset purchase agreement, or APA, is the legally binding contract used when a buyer acquires the assets of a business rather than the shares of the company that owns them. The three clauses that do most of the work are the purchase price and payment terms, the schedule of assets, and the seller's warranties. There is also one trap, around registered trade marks, that catches buyers who assume the APA transfers everything on its own.

What is an asset purchase agreement?

In short, an asset purchase agreement is a legally binding contract under which a buyer buys the assets of a business, and those assets allow the buyer to run that business as a going concern. The buyer is not acquiring the company itself; it is acquiring the things the company uses to trade.

The assets included in such a purchase might be, for example, the equipment, the inventory and the customer list of the target business. Exactly which assets are included is a matter of negotiation, and that is one of the attractions of the structure: you take what you want and leave the rest behind.

Purchase price and payment terms

The first clause you typically find in an asset purchase agreement deals with the purchase price and the payment terms. Two questions are answered here:

• How much is the buyer paying for the assets?
• How is that price being paid? Is it all payable on completion, or is there an element of deferred consideration, meaning part of the purchase price is paid over a period of time after the assets have been bought?

Deferred consideration is common, and if it is used the agreement needs to spell out when each payment falls due and on what conditions.

Schedule of assets and valuations

The second clause is a description, or list, of the assets included in the purchase. Typically these are detailed in a schedule to the asset purchase agreement, and the corresponding figures for the valuation of each asset are set out in that same schedule.

This schedule matters more than it looks. In a share purchase, everything the company owns comes with it automatically. In an asset purchase, only what is listed transfers. If an asset is missing from the schedule, there is a real argument that you have not bought it. The valuations attached to each asset also matter, because they record how the overall price has been allocated between the different things you are buying.

Seller warranties in an asset purchase

The third clause, and a very important one, covers the representations and warranties the seller gives to the buyer. These are the seller's promises about the assets and the business.

A basic example: the seller will warrant to the buyer that they have the requisite authority to sell those assets. That sounds obvious, but it is the foundation of the whole deal. If the seller does not have the right to sell what it is selling, the buyer has paid for something it cannot keep. Beyond authority, warranties will typically cover the condition and ownership of the assets and the state of the business more generally, and they give the buyer a claim against the seller if a promise turns out to be untrue.

Transferring trade marks on an asset purchase

Asset purchase agreements can be quite complex, and the chances of making a mistake in the eyes of the law are significant. Here is a common example.

Suppose you are buying the assets of a company and you want to take on the business name. If that business name happens to be registered as a trade mark with the UK Intellectual Property Office, the asset purchase agreement on its own is not enough. A separate set of documents will need to be signed on completion for there to be a legally valid transfer of that registered trade mark.

Buyers who miss this end up owning the equipment and the customer list but not the brand they are trading under. It is exactly the sort of detail that a solicitor experienced in asset purchases will pick up and that a generic template will not.

Asset purchase agreement versus share purchase agreement

So what is the main difference between an asset purchase agreement and a share purchase agreement?

• Asset purchase agreement. The buyer is buying specific assets from a company. The company remains in the seller's hands, minus the assets that have been sold.
• Share purchase agreement. The buyer is buying the ownership of the company itself. The company remains the same and continues to hold the same assets; what changes is who owns the shares.

The two structures are treated differently in several respects, including tax, and the choice between them should be made before the deal documents are drafted. For a fuller comparison, see Share purchase vs asset purchase.

Next steps

If you are buying the assets of a business, make sure the agreement sets out the price and payment terms clearly, lists every asset you expect to receive in a schedule with its value, and contains proper warranties from the seller, starting with its authority to sell. Check whether any business names or brands are registered trade marks, because those need their own transfer documents at completion. Speak to a corporate solicitor before the agreement is drafted rather than relying on a template.