An asset purchase agreement (APA) is an agreement between a buyer and a seller that finalizes terms and conditions related to the purchase and sale of a company’s assets.
It is not necessary for the buyer to purchase all of the assets of the company. In fact, it’s common for a buyer to exclude certain assets in an APA.
Provisions of an APA may include:
- payment of purchase
- price
- monthly installments,
- liens and encumbrances on the assets,
- the condition precedent for the closing, etc.
An APA differs from a stock purchase agreement (SPA) where company shares, title to assets, and title to liabilities are also sold. In an APA, the buyer must select specific assets and avoid redundant assets. These assets are itemized in a schedule to the APA. The buyer in a SPA is purchasing shares of the company. In this case, itemization is not necessary due to the transfer of the company’s ownership occurs as is. The APA is the legal mechanism for executing a corporate merger or acquisition.
Defining and controlling behavior is a major objective of the APA. The buyer must represent its authority to purchase the asset. The seller must represent its authority to sell the asset. Additionally, the seller represents that the purchase price of the asset is equal to its value and that the seller is not in financial or legal trouble.
In the context of a merger or acquisition transaction, asset purchase agreements have a distinct set of advantages and disadvantages compared to using an equity (or stock) purchase agreement or a merger agreement. In an equity or merger acquisition, the purchaser is guaranteed to receive all of the target’s assets without exception, but also automatically assumes all of the target’s liabilities.
An asset purchase agreement, alternatively, allows not only for a transaction where only some of the assets are transferred (which is sometimes desired) but also allows the parties to negotiate which liabilities of the target are expressly assumed by the purchaser, and allows the purchaser to leave behind those liabilities it does not wish to accept (or does not know about). A disadvantage of an asset purchase agreement is that it can often result in a greater number of change of control issues.
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