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You’re “Only Buying the Assets”? Famous Last Words
A wise law firm once said, M&A Stands for “Mergers & Acquisitions”, not “Misunderstandings & Aggravation”. Let’s talk asset purchases and the aggravations a buyer may deal with there. Typically, when a buyer envisions an asset purchase, they assume it’s a clean sale with a clean slate. While yes, an asset purchase essentially gives buyers more control and allows them to cherry-pick and choose which business assets (contracts, inventory, lease, etc.) they’d like to acquire from the seller, it doesn’t mean they get to leave every problem at the closing table. As with any agreement, there are key considerations and hidden traps in an asset purchase agreement (“APA”). An asset purchase is less like a nice Sunday stroll through Goodwill with a PSL in hand and more like navigating a potential minefield with a contract in hand. Done wrong, you bought the risk of a lawsuit along with the bar stools. If hearing this makes you sit up a bit taller in your chair, good! Read on for more!
Defining “Assets”
Last time we discussed the importance of “scope”. This concept applies in asset purchases too. It’s critical to clearly define what the “assets” actually are. For instance, in most APAs you’re acquiring the business, its contracts, its tangible assets like equipment and furniture, and its intangible assets like intellectual property. What if there’s a specific asset that, without it, you might as well have bought a pile of sand? Identify it at the LOI stage, and make sure it’s clearly laid out in the APA. While most APAs will have certain catch-all language, what you’re trying to avoid is an unnecessary back and forth and potential litigation on what the assets actually were.
Stopping the Seller from Becoming Your Biggest Competitor
Imagine you purchase all of the assets of a cute bike shop downtown, with a decades-long history with the neighborhood and loyal customers. The bike store is owned by a really nice guy who just loves bikes. Let’s call him . . . Mr. Herman. As part of the purchase you get an assignment of the lease, all of his inventory, his client contracts, vendor contracts, presumably his goodwill and relationships, the works. One day you show up to open the store and see that a brand-new bicycle shop called “The Alamo’s Basement” opened up right next door. Yikes. Make sure your APAs include non-compete and non-solicitation provisions, to avoid the seller turning around and starting up the same business within your geographical area or stealing all of your people while the ink is still drying.
Limiting Liability
The golden rule of an asset purchase is that you’re buying assets, not liabilities. However, some sneaky sellers may add hidden liabilities or carve outs into the deal. If a buyer is taking over certain payroll, vendor contracts, warranties, or other agreements, for example, the APA should clearly provide that the seller is responsible for any pre-closing liabilities there, and the buyer is responsible for any post-closing liabilities. A strong “excluded liabilities” clause is critical, to ensure that any unknown or purposely undisclosed liabilities don’t stick with you. While conducting adequate due diligence is also important, there could be unknown issues that aren’t part of the public record. The last thing you need is to pay for someone else’s mistakes.
Getting the Right Reps and Warranties
The representations and warranties portion of the APA is where the seller swears up and down that there actually aren’t any liabilities to worry about anyway, and that the assets themselves are legitimate. For example, this clause is where the seller represents that they actually own the assets to begin with, that no one else has a lien on them or rights to them, and that there’s no secret litigation waiting to pounce on you. While it may have a bunch of legalese, it isn’t just fluff, it’s what you’ll turn to if something blows up later. The broader this provision is, the better protected you are.
Navigating Indemnification
Even with the cleanest APA, this is business, so surprises unfortunately do happen. To tie all of this liability stuff together, it’s also important that a buyer and seller agree to indemnify each other for any liabilities caused by seller pre-closing, or buyer post-closing. An indemnification clause answers the question of: “If this deal goes south, who cuts the check?” Some sellers will try to limit overall indemnity to a certain dollar amount, or have it only survive for a certain time period to provide certainty. Either way, the theme is the same, your APA, like any other agreement, is there to protect you.
If after reading all this you’re still not sure what level of protection is really needed, well: as always, if you’ve got questions, you know we’ve got answers!
~ The W + K Team
ABOUT WEINSTEIN + KLEIN P.C.
Founded in 2019, Weinstein + Klein is a modern boutique law firm that serves as outside general counsel to businesses across industries. Weinstein + Klein provides strategic, day-to-day legal support with a focus on labor and employment law, corporate and transactional matters, and business litigation. Weinstein + Klein works closely with business owners, executives, and entrepreneurs to proactively manage risk, navigate complex employment issues, and handle key transactions – from formation to funding to exit.