Lower Middle Market M&A: Common Terms in Asset Purchase Agreements

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asset purchase agreement terms
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An Asset Purchase Agreement (APA) is a crucial document in Mergers and Acquisitions (M&A) transactions, especially in the lower middle market. It details the sale of specific assets from one party to another, outlining the rights, responsibilities, and obligations of both the buyer and the seller. Here is a comprehensive list of the most common terms used in Asset Purchase Agreements, along with their definitions:

1. Assets Being Sold

This term refers to the specific assets being transferred from the seller to the buyer. These can include tangible assets (such as equipment, inventory, real estate) and intangible assets (like intellectual property, trademarks, and customer lists).

2. Purchase Price

The purchase price is the total amount the buyer agrees to pay for the assets. It can be structured in various ways, including lump-sum payments, installment payments, or a combination of cash and stock.

3. Liabilities Assumed

Liabilities assumed are the debts or obligations that the buyer agrees to take on as part of the transaction. This could include accounts payable, leases, or contracts.

4. Excluded Assets

These are the assets that are explicitly not part of the sale. Excluded assets could be cash, accounts receivable, personal property, or other items the seller wants to retain.

5. Representations and Warranties

These are statements made by the seller about the condition and legality of the assets being sold. Common representations and warranties relate to ownership, title, compliance with laws, and the absence of undisclosed liabilities.

6. Covenants

Covenants are agreements or promises made by the seller or buyer to take or refrain from certain actions. Common covenants in an APA include non-compete agreements, confidentiality provisions, and cooperation in obtaining necessary approvals.

7. Closing Conditions

These are the conditions that must be met for the transaction to close. They can include regulatory approvals, third-party consents, satisfactory due diligence, and the absence of material adverse changes in the seller’s business.

8. Indemnification

Indemnification involves the seller’s obligation to compensate the buyer for losses or damages arising from breaches of representations, warranties, or covenants. The APA often specifies the scope of indemnification, including time limits and monetary caps.

9. Escrow

An escrow is a third-party account where a portion of the purchase price is held temporarily. It serves as a safeguard for the buyer in case of indemnification claims or unresolved issues post-closing.

10. Transition Services

Transition services refer to the support and assistance the seller agrees to provide to the buyer after closing. This can include training, IT support, or other operational services to facilitate a smooth transition.

11. Non-Compete Agreement

A non-compete agreement prohibits the seller from competing with the buyer’s business for a specified period and within a defined geographical area.

12. Asset Allocation

Asset allocation determines how the purchase price is allocated among the different types of assets for tax purposes. This allocation can affect the tax liabilities of both the buyer and the seller.

13. Earnout

An earnout is a payment structure where the seller receives additional compensation based on the post-closing performance of the business. It is often used to bridge valuation gaps or align incentives.

14. Proration

Proration involves allocating certain costs and expenses between the buyer and seller based on the date of closing. This can include property taxes, utility bills, and other ongoing expenses.

15. Closing

Closing is the final step in the transaction process, where all documents are signed, payments are made, and the ownership of the assets is transferred to the buyer.

Understanding these common terms is essential for anyone involved in Asset Purchase Agreements in the lower middle market. They form the foundation of the agreement and guide the entire transaction process from negotiation to closing.

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