An Asset Purchase Agreement is a legal contract between a buyer and a seller outlining the terms and conditions of the purchase of specific assets from a business. Unlike a stock purchase agreement, which transfers ownership of the entire business entity, an asset purchase agreement allows the buyer to selectively acquire only the assets they desire, such as equipment, inventory, intellectual property, or real estate, while leaving behind certain liabilities or undesirable assets.
The agreement typically includes several key components:
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Identification of Assets: The agreement specifically lists the assets being purchased, providing clarity on what is included in the transaction.
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Purchase Price: The total price being paid for the assets is detailed, along with any payment structure (e.g., upfront payment, installments, or contingent payments based on performance).
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Representations and Warranties: Both parties make certain representations about the assets being sold, including their condition, ownership, and any encumbrances (like liens).
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Closing Conditions: The agreement outlines any conditions that must be met before the transaction can be finalized, such as obtaining necessary approvals or permits.
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Indemnification: Provisions typically ensure that the seller indemnifies the buyer against any claims related to the assets that arise from actions taken before the sale.
For example, if a company is selling its manufacturing segment, the asset purchase agreement would specify which machinery, patents, and customer contracts are included in the sale, while the seller retains other parts of the business, such as its brand or real estate. This type of agreement is particularly useful in bankruptcy situations or when a buyer seeks to avoid certain liabilities associated with the seller’s business operations.