Asset Purchase Agreements – Houston Law Firm
This is an agreement between a seller and a buyer that finalizes the terms and conditions governing the sale and the purchase of the assets of a company. This is a binding document that requires the parties involved to be specific and take great care with regards to extract transaction that they want to conduct. This means that they ought to be careful and specify the assets that will transfer ownership and those that will not. This article by RunRex.com gives a detailed view of Asset Purchase Agreements.
Normally, a buyer would want to purchase the assets of the business while the seller would prefer to sell equity stake instead. In an Asset Purchase Agreement, the buyer can specify the exact assets that they would want to buy and the precise liabilities they would want to take over. As such, it is important for both parties to be aware of what exactly is being purchased.
Assets that may be involved in the purchase transaction may include plant and machinery, contracts, business premises, know-how, and goodwill. The main components of an Asset Purchase Agreement include:
- Employee and Transfer of Undertakings Regulations
The transfer of undertakings regulations is meant to protect the rights of the employees upon the transfer of the business assets. The main principal observed here is that if the buyer is purchasing the business assets as a “going concern,” the employees that are engaged in the business will also be included in the transfer and be under the new buyer automatically. As such, it is important that the seller communicates and consults with the affected employees early enough to inform them of what their future holds.
This is a fairly critical aspect of an Asset Purchase Agreement. As such, it is always advisable that one employs the services of a corporate attorney or advisors to help provide guidance on the issue.
- Goodwill
This is an expectation by the seller that having purchased something from their business, the customer will come back in future for further transactions. Thus, the buyer seeks reassurance from the seller that they will not affect the goodwill of the buyer. This guarantee is usually enhanced by the signing restrictive covenants into the asset purchase agreement, like signing a non-competition clause.
- Value Added Tax
The agreement would normally include a clause that deals with Value Added Tax. However, this clause can be ignored if the purchase is made “as a going concern.”
- Stock
Stocks must be identified and the necessary mechanism set up to valuation upon completion. A stock check is normally taken upon completion which will now give the actual value that is different from the estimated value. This will vary the purchase price.
Other Considerations in an Asset Purchase Agreement
- Financing
This involves the specification of how the purchase of the assets will be financed. The source of the finances to facilitate the purchase can be from a bank, personal accounts or from other legal sources. It is important to evaluate how the source of financing will affect the period of transactions. Best practice calls for purchase transactions to be completed within specified timeframes.
- Liabilities to be transferred
The asset purchase agreement should be very specific with regards to the liabilities that will be transferred to the buyer and those that will remain to be under the seller.
- Determining the purchase prices
The exact assets to be sold have to be specified. Once these assets have been identified, their purchase price is determined. The buyer and the seller can agree on the price before or after completion of the transfer just in case the value of the asset is likely to change over the period of the transfer. The payment method is to be discussed too. The parties have to agree on the period during which the payment is to be done. For example, the payment can be done gradually over time depending on the income that is generated by the asset purchased.
- Any restrictions post the completion of the Asset Purchase Agreement
This is part of the Goodwill by the seller. The buyer might consider restricting certain operations by the seller after the completion of the purchase like soliciting employees.
- Tax
Tax is one of the major considerations that the parties have to be keen on, particularly the seller. However, the buyer may have to pay stamp duty, although not all assets are subject to stamp duty. It is advisable that you consult with your attorney to determine the assets that require stamp duty to be paid and the rate of the payment. Also, consider whether the transaction will be subject to value-added tax.
An asset purchase agreement is important in ensuring that the purchase of assets is done smoothly. The parties involved should be keen to ensure that that agreement is as specific as possible and that proper valuation of the assets being purchased is done.