Buyer Considerations in Asset Purchases
By: Jordan Sibley
Companies acquire assets for a number of operational reasons, but it is almost certain that a business will contract for a large asset acquisition sometime in its life cycle. Whether the assets are classified as inventory, equipment, contracts, or intellectual property, asset acquisitions are preferred in the mergers and acquisitions (“M&A”) arena because they have reduced liability concerns rather than an acquisition of a business. However, before wading too deep into these asset purchase transactions, buyers should carefully evaluate the purchase considerations and deal points surrounding the assets.
- Document the Deal. Most all asset transactions use an asset purchase agreement to memorialize the transaction. These documents serve as the central understanding between both buyer and seller, and it is necessary to have these agreements carefully drafted by counsel. Outside the purchase price and sale structure, these documents should carefully identify the assets, articulate the seller representations and warranties, detail when and how the transaction will close, and list any conditions for the parties.
- Identify the Assets. The buyer should cherry-pick which particular assets it desires to purchase, rather than agreeing to a blanket acquisition of unidentified assets or a class of assets. This can be solved by creating a schedule in the asset purchase agreement which identifies the specific assets that the buyer intends to purchase from the seller. Specifically listing each asset provides clarity for both parties and leaves no room for confusion come closing time.
- Check for Liens, Encumbrances, and Claims. Buyers have the ability to run a “UCC search” to ensure that the assets they intend to purchase are not encumbered by another party. “Encumbrance” means filed liens and claims for payment that are due to a third party, which have been secured by the assets. If other parties have a claim to the assets that the buyer wants purchase, then the seller needs to obtain third-party lien releases to ensure the buyer will take title to the assets free and clear. The last thing a buyer needs is acquiring an asset that is subject to a third party’s interest.
- Investigate the Assets. Buyer investigation as to the quality, condition, or enforceability of the assets is vital. This is typically done during the “due diligence” period as provided in the asset purchase agreement. Buyer due diligence is absolutely key with an asset acquisition, and it is often the most expensive part of the purchase process. The Buyer always should consider employing a third-party professional to thoroughly inspect the assets in question to ensure they conform to the buyer’s expectations.
- Pre-Closing Considerations. The buyer always should give themselves the right to adjust the purchase price after inspecting the assets. It is customary to include those rights in the asset purchase agreement. Before any applicable due diligence period has ended, the buyer should confer with the seller to either remove any non-conforming assets from the purchase agreement, or negotiate a discount of the purchase price allocated to any non-conforming assets. It is worth noting, however, a buyer’s abuse of this pre-closing condition may run afoul of the seller.
- Post-Closing Considerations. It is wise for buyers to negotiate a sum of money to be set aside at closing for any post-closing issues that arise with the buyer’s purchased assets. Sellers commonly are willing to set aside a sum of money in escrow for asset issues that occur during a set time-period after the closing date. Think of it like a warranty, which typically ties into the seller’s representations made in the asset purchase agreement. Additionally, should there be any considerable changes to the assets after the closing date, or if the assets become unusable or invalid, then the buyer can negotiate a final purchase price adjustment or credit. Lastly, a strong option for the buyer requires the seller to insure the assets for an extended time after the closing date.
Asset purchases should be straightforward, but the buyer should remember the importance of the foregoing considerations to ensure its purchase holds true without disappointment.