Asset Purchase Agreements

The asset purchase agreement (APA) is the key document in any asset purchase and sale transaction. This article explains what should be in the APA.


The APA must identify the buyer and seller. If key shareholders will make representations and warranties (R&Ws), they should also be identified as parties to the APA. 


The APA should identify the assets purchased. Typically, these are listed on an exhibit or schedule to the APA. The APA should also identify the excluded assets. These assets should be specifically listed on an exhibit or a schedule.


As part of the deal, the buyer will typically require assignment of leases or other contracts. These contracts are typically listed as liabilities. The APA should specifically list the liabilities that the buyer will assume. The liabilities that are not assumed by the buyer don't need to be listed. The APA should simply state that unless a liability is assumed, it is the seller's responsibility.

Consideration and Manner of Payment

The APA must state the total amount that will be paid for the assets. The payment terms vary depending on the deal. However, regardless of how the purchase price will be paid, the APA should detail how the purchase price will be paid. If promissory notes will be signed by the buyer, forms should be attached as an exhibit to the APA. 

Purchase Price Adjustment

In some cases, the buyer will be acquiring cash and accounts receivable as part of the asset purchase. This cash and accounts receivable are typically referred to as "working capital." This working capital is key for the buyer. It allows it to purchase the assets and continue to run a business using those assets without infusing more cash into the business. If working capital is important to the buyer, then a manner of calculating the working capital should be addressed in the APA.

After the closing, the buyer and seller will typically finalize the amount of working capital. If the working capital was more than expected, the purchase price will typically be adjusted upward. In other words, the seller gets more money. On the other hand, if the working capital was less than what the buyer required, the purchase price will be reduced.

The APA should address how a dispute between the buyer and seller on how working capital was calculated. The resolution of the dispute can be handled many different ways. For example, if the seller believes the working capital calculation is wrong, it can demand that an independent accounting firm be provided all the information necessary to calculate the working capital. Within a specific period of time, the accounting firm will determine the amount of working capital. The buyer and seller agree before they sign the APA to accept the calculation of the accounting firm. This process reduces (or maybe even eliminate) the risk of lawsuits over working capital and adjustment of the purchase price.

Allocation of the Purchase Price

The buyer and seller should try to agree on the allocation of the purchase price. The allocation of the purchase price will be provided to the Internal Revenue Service (IRS) on Form 8594. If the buyer and seller can not agree, they can each file Form 8594 with their own allocations. But the APA should provide that the buyer and seller will work in good faith to resolve the differences. If the IRS disagrees with the allocation, the buyer and seller should agree to work together on resolving the disagreement with the IRS. Finally, if the purchase price is adjusted, the buyer and seller should agree to file an amended Form 9594. 

Representations and Warranties

R&Ws are the biggest topic of negotiation between a buyer and seller. Because the scope of R&Ws is so large, we address it separately. Click here to read more about R&Ws. 


Covenants are similar to R&Ws, but are actually promises made by the seller to the buyer. Covenants vary depending on the deal, but here are some that could be in the APA.

Employment Matters

The seller may covenant to the buyer that employees have accepted an offer of employment from the buyer. These employees should be identified in an exhibit or schedule to the APA. The seller may also covenant to fire all its employees that the buyer will employ and it can do it legally. The seller will typically covenant that it has paid all the wages, bonuses, paid time off, vacation, etc. that is owed to the "transferred employees." 


The seller may also covenant that it will pay all taxes related to the transaction and file appropriate tax returns. Both the buyer and seller will covenant to assist one another in filing of tax returns, including providing relevant information to one another. Finally, the buyer and seller may wish to address the payment of taxes during a "straddle period." The straddle period is the time period beginning on or prior to the effective date of the APA and ending after the effective date but before closing. 


The buyer will almost always insist that the seller and its owners/key employees covenant not to compete with the buyer after the closing. In addition, the seller and its owners/key employees usually covenant not to solicit employees of the buyer and keep information confidential about the business and the APA confidential.

Further Assurances

The seller and its owners will usually covenant to execute and deliver such other instruments to complete the transaction. This allows the parties to clean up any technical problems with the transfer of assets to the buyer from the seller. The seller will typically also agree to deliver any money from sales that are due to the buyer after the closing. 

All Records

The sellers and its owners will also covenant that it has and will deliver to the buyer all the records of the business. This will include access to servers, cloud storage and computer files. 

Accounts Receivable

The sellers and its owners will agree to provide all accounts receivable if those are a sold asset, which in most cases they are because they count toward working capital.

Discharge of Debts

In some cases, the seller also covenants to discharge all debts after the closing. This includes closing out credit cards that employees may use.

Change of Name

Finally, the seller will usually covenant to change its name. 

Of course, this is not a complete list of covenants, but it some that are common in an asset purchase agreement.


This is a major item of the asset purchase agreement. Typically, the seller along with its owners will agree to indemnify, defend and save harmless the buyer from all losses related to inaccuracy or breach of any R&W made by the seller; breach of the covenants by the seller; any action that would result from a breach of the R&W and covenants; and any excluded liabilities, transaction expenses, and pay offs. 

The buyer will typically indemnify, defend and save the seller from all losses related to inaccuracy or breach of any R&W made by the buyer; breach of the covenants by the buyer; and any assumed liabilities. 

The goal of the indemnification clause is to allocate responsibility for liabilities that may arise after the closing of the transaction. 

The asset purchase agreement should provide a procedure to deal with indemnification claims. For example, the party receiving a claim that is the responsibility of the other party will notify the other party that the claim was received. The other party has a certain period of time (e.g., 10 days) to accept defense of the claim or reject the claim. If the claim is rejected, the party who received the claim can deal with it to avoid a default and will have the right to collect from the other party if the claim was wrongfully rejected.


It may be wise for the asset purchase agreement to address insurance that the seller will have to carry post closing. For example, the seller may want or need to carry liability insurance for a period of time after closing. How this is paid for if all the cash is distributed should be addressed in the asset purchase agreement. 

Miscellaneous Provisions

The asset purchase agreement should contain "boilerplate" provisions regarding notice, applicable law, severability, etc. However, one item that may be overlooked is whether the parties will announce the sale to the public. In some cases, that is a good thing for one of the parties but not the other. It should be addressed.

Schedules and Exhibits

Schedules and exhibits to the asset purchase agreement usually cover a lot of different items. Exhibits will typically cover the definitions, deliverables, form of documents (assignments of leases, bill of sale, trademark assignments), and sample calculations of working capital.

Schedules will typically include hundreds if not thousands of pages of documents, including tax returns, contracts, insurance policies, licenses, and other matters. Though these are attached to the asset purchase agreement, close attention needs to be paid to them because the R&Ws will often reference them. 


An asset purchase agreement is a complex document. This article is not intended to cover all the topics that will be in an asset purchase agreement. This is merely a general overview.