Asset Purchase Agreements Explained

You may have heard of asset purchase agreements if you intend to buy or sell your practice. But do you understand what these agreements are and when you may need one?

Are you looking to buy a portion of an already established practice? Or are you planning to sell your practice but need a better understanding of asset purchase agreements before moving forward? This article helps explain what an asset purchase agreement is, when you may need one, and how it differs from other types of legal arrangements you may enter. 

What Is an Asset Purchase Agreement? 

An asset purchase agreement formalizes the purchase of a business or a significant business asset. More specifically, it sets out the terms and conditions relating to the sale and purchase of the assets in a company. 

An asset purchase agreement allows a buyer to pick the precise assets they want to purchase and identify any liabilities they wish to assume. Thus, the asset purchase agreement must describe in detail the assets to be purchased, as well as the rights and responsibilities of both parties. 

When trying to understand what an asset purchase agreement is, it helps to clarify what it is not. An asset purchase agreement is distinct from a stock purchase agreement. In a stock purchase agreement, the buyer steps into the seller’s shoes. This means the buyer will control the shares of the company and take on all assets and liabilities. Thus, the stock purchase agreement generally would not itemize the assets sold because the entity’s ownership interests transfer entirely. 

What distinguishes an asset purchase agreement from a stock purchase agreement is that the parties can decide which assets to sell and which to exclude. In this way, asset purchase agreements typically offer more flexibility. 

What Assets Potentially Make Up an Asset Purchase Agreement?

Assets transferred as part of an asset purchase agreement may include:

• Physical property, such as the office space where services are rendered and the materials needed to administer services. It can also include items such as computers or furniture.
• Intellectual property, such as the seller’s website, patents, copyrights, trademarks, and logos.
• Existing contracts, such as leases (if the contract’s original terms allow).
• Personnel, including employees and independent contractors, if there are no employment contracts in place that prohibit such a transfer.
• Know-how, that is, the ability to achieve a task or service due to a specific skill or knowledge.
• Goodwill, which incorporates the good reputation or brand identification that the entity enjoys. The buyer is seeking reassurance that they are protected from the seller adversely affecting its goodwill.

Notice that asset purchase agreements can cover intangible assets — most notably goodwill and know-how. In service industries such as healthcare, these can be an organization’s most valuable assets. For example, you’ve spent a long time studying and developing knowledge in your field. Moreover, years of patient interactions have earned customer loyalty, positive online reviews, and esteem within the community. These critical components contribute to the overall value of your business and thus, you should account for them in your negotiations.

When Does Someone Need an Asset Purchase Agreement?

Buyers and sellers may choose an asset purchase agreement over a stock purchase agreement to leverage its greater flexibility, which can prove advantageous in a wide range of scenarios. It may also bypass issues that arise when minority shareholders are unhappy about transferring stock.

Let’s look at some examples.  Say you’re looking to buy a practice, but have no intention of acquiring the stock, shares, or liabilities. In this case, an asset purchase agreement might be the best option. 

An asset purchase agreement might also be ideal for someone looking to sell only a specific segment of their business. For instance, imagine you run a practice that currently offers both occupational therapy and speech-language pathology services. However, you decide that you want to focus solely on occupational therapy. In this instance, an asset purchase agreement may allow you to sell the speech-language pathology portions of the business to another entity. 

Drawbacks of Asset Purchase Agreements

Despite its greater flexibility, asset purchase agreements are not always the answer. Depending on your circumstances, asset purchase agreements may introduce various costs that may not exist if a purchaser were to fully “step into the shoes” of the buyer. 

For instance, if you have numerous contracts that may be part of the transaction, you’ll need to do your due diligence. Whether the buyer can take over these pre-existing contracts will depend on the terms of each individual contract or insurance policy. The time and personnel needed to review every relevant contract may prove too costly relative to your resources and potential gains.

Consider any business licenses or certifications as well. Some licenses or permits may not transfer to the buyer without a reapplication process, potentially jeopardizing operations.  And depending on the type of assets being exchanged, the buyer may need to engage in the retitling process. 

In short,  asset purchase agreements allow for a great deal of flexibility. At the same time, they may not be the best arrangement for transferring some assets.

How to Develop an Asset Purchase Agreement 

An asset purchase agreement is a lengthy contract critical to a practice’s smooth transition. It requires several detailed provisions requiring an experienced attorney. The attorneys at Jackson LLP can help you determine if you need an asset purchase agreement and assist with drafting, negotiating, and calculating goodwill. If you operate in one of the states where we practice, book a free consultation to determine if we fit your needs.

This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader and should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.