What Does
Asset Purchase Agreement Mean?
An asset purchase agreement (APA) is a definitive agreement that finalizes all terms and conditions related to the purchase and sale of a company’s assets. It is different from a stock purchase agreement (SPA) where company shares, including title to the assets and liabilities, are being bought/sold.
An APA covers the following sections:
- Interpretation: Provides the definitions for all major terms used in the overall body of the agreement
- Purchase and sale of stock: Itemizes the purchase price, any purchase price adjustments, purchase price allocation for tax purposes between seller and buyer and dispute resolution mechanisms
- Representations and warranties of the seller and buyer: Provides all statements that the seller and buyer are signing off to be true
- Matters related to employees: Provides terms on how employee benefits and any accrued bonuses should be handled post transaction
- Indemnifications: Provides details of all indemnifications for any costs that may arise post transaction as a result of conditions that existed prior to the deal closing
- Tax matters: Specifies any special tax treatment entitles to the seller or buyer
Divestopedia Explains Asset Purchase Agreement
The basic difference between an APA and SPA is the clear itemization of assets included and excluded in the purchase. When a buyer purchases the shares of a company, this itemization is not necessary because the company’s ownership transfers as is, including titles to all assets and liabilities – disclosed or undisclosed. With an asset purchase, the buyer may be selecting only specific assets, leaving behind redundant assets. Thus, the selected assets must be itemized in a schedule to the APA.
Similarly, any material contracts that are assumed, such as key customer contracts, also must be itemized in an APA because they stay with the selling company unless assigned over. As part of due diligence for an asset purchase, a buyer must ensure that all assigned customer contracts do not have specific clauses prohibiting such contract assignments.