The Asset Purchase Agreement Explained

An asset purchase agreement (APA) is a legal document that contains the terms and conditions of a sale and purchase of assets between a buyer and a seller. This agreement is commonly used where a company is buying or selling a business, which may be its entire business, made up of its assets, liabilities and staff.

If you are in need of legal advice for a asset purchase agreement book a free introductory call with a commercial solicitor from JPP Law.

If an asset purchase agreement relates to an entire business, it is sometimes called a business purchase agreement.  The main point to understand is that an asset purchase agreement is not an agreement to buy a company by buying all the shares in that company from the shareholders, it is an agreement to buy a business from a company.  The company is the seller, not the thing that is being bought and sold.

Why is the choice between an Asset Purchase and a Share Purchase Important?

The choice between Asset Purchase or Share Purchase is an important one.  Sellers usually prefer to sell all the shares in their company.  This is because they will often qualify for business assets disposal relief from capital gains tax if they do so, and therefore pay capital gains tax at 10% rather than the standard rate of 20%.  Buyers, on the other hand, often prefer to purchase the assets making up a business from the company.  This is because it allows them to choose which assets to purchase and which liabilities to leave with the selling company.  However, purchasing a business rather than shares does not allow a buyer to leave the employees who are involved in the business behind in the selling company.  The Transfer of Undertakings (Protection of Employment) Regulations cause the employees to transfer with the business by operation of law.

Key Components of an Asset Purchase Agreement

An asset purchase agreement typically includes the following key components:

  1. Identification of the Parties: The first section of an asset purchase agreement identifies the buyer and seller.
  1. Description of Assets: This section outlines the specific assets being sold and any liabilities being transferred.
  1. Purchase Price and Payment Terms: The purchase price is the amount that the buyer agrees to pay for the assets being sold.  The purchase price is often broken down into the price for each class of assets.
  1. Representations and Warranties: Representations and warranties are statements made by the seller about the assets being sold. These statements are meant to assure the buyer that the assets are in good condition and free from any encumbrances or liabilities.
  1. Sale as a Going Concern: This section is included if the assets being bought and sold are a business.  It is a statement that the parties intend to buy and sell an ongoing business (a ‘going concern’).  Assuming that this is correct, VAT will not be chargeable on the sale of the assets.
  1. Conditions to Closing: This section outlines any conditions that must be met before the sale can be completed. These conditions may include obtaining financing, obtaining necessary approvals, or completing due diligence.
  1. Governing Law and Dispute Resolution: This section specifies the laws that will govern the agreement and outlines the process for resolving any disputes that may arise between the parties.

Talk to JPP Law

Before entering into an asset purchase agreement, it is important for both buyers and sellers to take legal advice beginning with a free introductory call with a solicitor from JPP Law.

Related Reading

The Share Purchase Agreement Explained
Asset Sale versus Share Sale: What to Consider?

Mark Glenister

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