Asset Purchase Agreement Basics
An Asset Purchase Agreement is a contract between a seller and a buyer. The buyer is the person or business entity that is purchasing the franchise or business.
- Role of an Asset Purchase Agreement
The purpose of an Asset Purchase Agreement is to define the essential terms in a business transaction. The basic business transaction is the purchase and sale of a business. Typically, an Asset Purchase Agreement is used because a buyer purchases assets of a business. Generally, a buyer purchases all the seller’s rights, title and interest in and to the assets. The seller must transfer the assets at the sale of the business free and clear of all liens and encumbrances.
At closing, the seller will execute a Bill of Sale. A Bill of Sale transfers ownership of the personal and business assets such as furniture, fixtures, and equipment to the buyer, free and clear of any liens. Generally, a UCC Search is conducted to determine whether the seller has any liens that must be cleared up prior to the closing. In Illinois, a UCC Search is conducted through the Illinois Secretary of State’s Website.
On the contrary, a Stock Purchase Agreement is the type of business agreement where a buyer purchases the entire company such as a franchise, healthcare agency, or other business enterprise. Generally, buyers prefer a Stock Purchase Agreement when they are purchasing a valuable business license, Medicaid or Medicare license, or some other type of asset that is not easily transferrable to a new business entity. The downside to a Stock Purchase Agreement is that the buyer is also purchasing the liability concerns of a seller.
A Stock Purchase Agreement is placing one’s business interests in the same position as the seller, and is generally valuable only when one cannot simply purchase the assets of a business or franchise.
- Excluded Assets
A well-drafted Asset Purchase Agreement shall define Included and Excluded assets in the sale of the franchise or business. Excluded assets are typically assets owned by the seller such as accounts receivable and credit card company payments relating to the business prior to closing. Furthermore, Excluded assets are those which the seller does not have the rights to transfer because the seller does not own the assets. These assets include leased equipment, utility deposits, and security deposit for the lease.
Moreover, all insurance policies relating to the ownership or operation of the business should be excluded. The seller has a right to unearned premiums, refunds, all claims and possible claims under such insurance policies. A franchisee also may not have the intellectual property rights to the business name because the intellectual property rights and naming rights are owned by the franchisor.
- Earnest Money
Earnest money is typically deposited to show as a good faith gesture. Earnest money is a deposit towards the future purchase of a franchise or business. Generally, Earnest Money will be deposited into an Attorney’s Client Trust Account and will be refundable if the business transaction is not finalized.
- Assignment of Rights
Assignment of Rights are the rights and obligations set forth in a franchise agreement or business agreement. The buyer shall assume all of sellers rights as set forth in the franchise agreement. Moreover, the buyer will gain the additional protections of the franchise agreement with respect to obligations of the seller such as a non-compete agreement for a period.
- Purchase Price and Payment
An Asset Purchase Agreement should contain the Purchase Price. The Asset Purchase Agreement will also contain the amount of payment and the type of funds payable at closing, such as certified funds or electronic bank transfer. Typically, an Escrow Agreement may be required to be executed by buyer and seller if a third-party will be holding and transfer monies connected to the purchase and sale of the franchise or business. In this section, it should explain that the purchase price should be less the Earnest Money.
Inventory is the type of inventory that the seller will transfer to the buyer such as forms, business cards, credit card processing forms, and many other types of inventory. For example, a franchise owner may have key fobs, blank membership forms, cleaning and office supplies, branded products, and accessories.
- Franchisor and Franchise Fee
The buyer will typically pay a Franchisor Fee payable to the franchisor upon the purchase of a franchise. This franchise fee can range from $5,000 to $100,000. Rates vary depending on the nature and value of the franchisor. Generally, this paragraph will include the name of the franchise and its’ address.
- Asset Purchase Price Allocation
This provision will define how the purchase price was allocated to such items as the following:
|Franchise Transfer Fee||$5,000|
|Furniture, Fixtures, and Equipment||$500,000|
|Intellectual Property Rights||$25,000|
|Total Asset Purchase Price||$630,000|
- Real Estate Lease Assumption
This paragraph addresses whether the buyer will be assuming a new lease or will be taking over the rights and responsibilities of the seller’s commercial real estate lease. This provision may also explain that a buyer is responsible for rent, CAM, or other charges incurred under the lease. This provision likely will assign the responsibility for payment of the real estate lease as the seller’s obligation up to the closing date. After the closing date, the buyer shall be liable for these real estate-related lease expenses. This provision may also explain any contingencies to close.
- Financing (if applicable)
This provision shall explain whether the buyer is obtaining lender or seller financing. Seller financing may include execution of a personal guarantee and a loan agreement.
- Representations of Seller (Buyer)
The seller will make certain representations that the buyer must rely on such as the following:
- Seller is an entity in good standing with the Secretary of State (Illinois)
- Seller’s members, directors, and shareholders approve of the business or sale of the Franchise
- The Agreement is legal and binding upon the Seller and the Seller has the legal capacity to consent for the Seller
- The Seller has good and marketable title to the assets in its’ possessions, which it is selling (without any liens or encumbrances)
- The Seller is being honest and is not lying or withholding material adverse information
- There has been full disclosure by the Seller and Buyer
- Closing Date and Closing
This paragraph will explain the duties and obligations of the buyer and seller at or before the closing. The seller will transfer to the buyer all books, records, files, materials, correspondence, and written materials, as well as electronic data relating to the assets. The seller and buyer will execute proper and legally binding corporate and LLC authorizations and resolutions.
The business must not have incurred a material change in its business, which would adversely affect the buyer and the assets which are being purchased. Each party will have complied with all covenants and agreements as set forth in the Asset Purchase Agreement. The Seller will provide a Bill of Sale transferring the business assets to the buyer free and clear of any liens. The buyer also will have obtained approval by the franchisor and filled out necessary documents required by the franchisor to transfer the business to buyer. The buyer and seller will conduct a walk-through and it is recommended that the buyer and seller make sure all the personal and business property have been properly inventoried and transferred. Generally, the commercial real estate lease will be signed prior or at the same time as closing of the franchise or business.
- Post-Closing Obligations
This paragraph will address the items and obligations that must occur after closing, such as the buyer purchasing their own insurances, utilities being placed in their name, and contracted with other vendors. Seller will terminate its insurances, cancel utilities, and secure their deposits. Any training should be defined and well-written. This paragraph should define the seller’s role (if any) to enable a smooth transition including introductions to management and employees.
- Confidentiality and Non-Disparaging Remarks
A confidentiality and non-disparaging remarks clause are a key clause in an Asset Purchase Agreement. A confidentiality clause is a requirement that certain discussions or subjects remain secret and confidential, with no public knowledge. The buyer and seller may have legal obligations to keep certain trade secrets or business practices confidential.
- Further Assurances
This paragraph requires both parties to execute any further documents and take any further action, which is deemed necessary or appropriate to effectuate the terms and conditions of the Asset Purchase Agreement.
- Effects of Headings
The subject of headings of the paragraphs and subparagraphs of this Agreement shall not affect the construction or interpretation of any of its provisions.
- Entire Agreement and Modifications
This Agreement constitutes the entire agreement between the parties pertaining to the subject matter and supersedes all prior and contemporaneous agreements, representations, and understandings of the parties. No waivers shall occur without the expresses written consent of all parties to the contract. The purpose of this provision is to reduce terms of the transaction to the written Asset Purchase Agreement.
Counterparts is the ability for each party to execute simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This provision makes it easier for the parties to execute their own documents without the parties executing the same document for everybody. Practically speaking, Counterparts is a business necessity.
- Governing Law
Governing law explains which state and venue is proper upon a dispute arising.
Severability is the ability of a court to strike an invalid sentence or paragraph instead of finding the whole Purchase Agreement invalid.
- Dispute Resolution
This paragraph addresses how disputes will be resolved and the appropriate jurisdiction and venue for such disputes.
The Role of an Attorney
When buying or selling a franchise or business, a purchase agreement attorney plays a vital role in the transacation. Generally, a business attorney guides a buyer or seller of a franchise or business on how best to purchase or sale the business or franchise. A significant part of a business attorney’s job is to draft and review the purchase agreement. A well-written business purchase agreement limits and protects one’s economic interests.
Our business attorneys are skilled at negotiating and drafting Asset Purchase Agreements and the purchase and sale of a business including a franchise. We have unmatched experience in addressing Asset Purchase Agreements, stock purchase agreements, commercial real estate leases, and other legal considerations.
Sean Robertson of Gateville Law Firm is an experienced business and franchise attorney .As a fellow entrepreneur, Attorney Robertson understands how business, tax, and legal considerations impact one another. He has significant skill with the following areas of law:
- Entity Selection and Asset Protection
- Business Purchase and Sale of a Franchise or Business
- Commercial Real Estate Leases
- Sale of Commercial Real Estate
- Asset Purchase Agreement Drafting and Reviewing
- Stock Purchase Agreement Drafting and Reviewing
- Franchise Document Review