An Asset Purchase Agreement (APA) is the most commonly used document in commercial transactions, such as deals involving purchases of commodities, shares, businesses and real estate. These types of contracts are vital to business activity.
To execute any deal successfully you need the protection of a well drafted APA, but often buyers or sellers fail to take even the basic steps required to protect their own interests.
1. Doing the Deal with the Wrong Person
The best drafted APA in the world is of no use to you if you sign it with a fraudster or an incompetent. This seems so obvious, but tons of people do deals without doing critical due diligence, including:
- review of books and records for the last 5 years
- interviewing customers and partners
- checking if the company is current on taxes
- checking if there is any litigation against the Seller or the business
- making sure you are clear about debt – both secured and unsecured debt
It comes down to really understanding who the Seller is. Sellers can also be led down the rabbit hole with a buyer who is fishing for a deal but not sincere. It is crucial for sellers to get a proof of funds right away and references regarding his/her ability to execute on the deal.
2. Essential Parties Are Not Part of the APA
3. Failure to Identify and Address Essential Pre-Conditions to the Deal
Conditions precedent are conditions and events which must be resolved before a transaction detailed in an APA can be completed. Any buyer or seller has to identify all these preconditions and make sure they are all properly addressed in the APA. Important conditions to include are:
- clearance of the seller’s debts
- third party consents
- transferring key employees
- banking approvals
- clearances and approvals from the appropriate authorities
You can as the Buyer put money in escrow for the sale just like when you are buying a house, and that money stays in escrow until all the preconditions to the deal are met.
4. Failure to Specify a “Long Stop Date”
5. Failure to Agree Necessary Financial Adjustments
In some deals, buyers seek to protect themselves by including a post-acquisition price adjustment. Upon completion of the transaction, the buyer’s accountants finalize the accounts and determine the net assets of the company to evaluate whether the price paid at completion was greater or lower than agreed. If the price was greater than the value, the buyer will be granted a reconciliation payment. An alternative to the post completion price adjustment is the “locked-box” approach in which the seller makes a detailed and specific commitment as to the value of the business’s net assets at closing. If the business suffers major losses or the sellers strip out dividends, any buyer without these safeguards will be financially exposed. Frequently, Buyers and Sellers do a simple APA and don’t address that the value of the assets changed. Buyers should really think about this issue and include it in their APA.
6. Failure to be Specific about Closing Requirements
7. Failure to Protect Against Competition from the Seller
Any buyer should consider whether it is appropriate that the APA contain contractual terms restricting the seller from competing with or soliciting customers and suppliers, and against poaching employees of the business for a specified period of time after completion. All APA agreements should include confidentiality agreements, non-solicitation agreements, non-compete agreements and IP protection overall. Better to be safe than sorry.
8. Failure to Change Signatories
Often, buyers overlook the need to change the signatories to essential banking and business accounts. Third parties must be notified in a timely fashion of the new owners and accept the signatories. This also includes the transition of all accounts for websites, marketing, social media, bank accounts, memberships, subscriptions, databases and cloud services. It is ideal for the APA to include provisions that require the Seller to assist the Buyer with transition items for a period of time, say 3 to 6 months depending on the complexity of the transaction and the business operations.
9. No Simple and Effective Dispute Resolution
10. Skimping on Lawyers’ Fees
This is definitely my personal rant. I used to spend a ton of time undoing the messes caused by clients using online inadequate forms for their APAs. They needed me to fix the mess after the transaction closed. This is because often parties download “ready-made” contracts from the internet, adapt a form from the last deal or try to draft the contract themselves. Ensure you have a specialist lawyer review the APA. Lawyers’ fees for reviewing APAs are often a tiny fraction of lawyers’ fees for litigation, or catastrophic financial losses from a deal gone bad or a deal which should never have been done. As much as we lawyers want to earn a living fixing your messes, we would much rather earn a living by proactively avoiding messes as the general counsel for your new business.