Before you sign anything in a business purchase, you need to understand the document that controls the entire deal: the asset purchase agreement, or APA.
In this article, Massachusetts business attorney Mark Bross of Bross Law, LLC walks through the six most important clauses every first-time buyer should understand before signing an APA, so you can avoid expensive surprises and protect your investment.
The APA is heavily negotiated by both sides and serves as the road map for the deal. It outlines what you are buying, what you are not buying, and the protections both sides have after closing.
1. Purchase Price and Payment Terms
The purchase price clause does more than state a number. It specifies exactly how the price will be paid. There are usually four components.
Deposits. Buyers often pay a deposit at two stages: when they sign the letter of intent (LOI) and when both parties sign the APA. Both are typically held in escrow by the broker or one of the attorneys. The APA should identify the total deposits paid. For example, $10,000 with the LOI plus $25,000 with the APA means $35,000 has been paid and will be credited toward the price.
Financing. If part of the price is financed, the APA should identify the amount and source: a third-party lender like a bank, or seller financing, where the seller accepts a promissory note from the buyer.
Escrow holdback. Sometimes a portion of the price is held back in escrow to protect the buyer when events after closing are uncertain. For example, if a key customer might not stay with the business after the sale, a portion can sit in escrow for a couple of months and be paid to either the buyer or seller depending on what the customer does.
Cash due at closing. This is the amount the buyer actually pays on the closing date, usually by certified bank check or wire. The figure listed in the APA is rarely what changes hands. Adjustments for deposits already paid, utility accounts, unredeemed gift cards, and other items will increase or decrease the final number.
2. Assets Being Purchased (and Excluded Assets)
The assets clause identifies the exact assets the buyer is buying. This sounds obvious, but many buyers skip over this section and leave it up to chance.
A strong assets clause does two things. First, it states generally that the buyer is buying all of the seller’s rights, title, and interests in any and all assets used in connection with the operation of the business. That language captures the essential assets even if they are not specifically named.
Second, the clause should specifically identify the exact assets being purchased. It should say something like, “the business assets being purchased include but are not limited to,” and then list them: equipment, customer lists, inventory, motor vehicles, intellectual property, websites and domains, trademarks, goodwill, and so on. To keep the clause readable, the APA often references an exhibit or schedule that lists every asset in detail.
The section should also include an excluded assets subsection identifying what the seller is keeping. Common exclusions: the seller’s bank account, accounts receivable, and personal items.
Unlike a stock purchase, where the buyer takes all assets and liabilities, in an asset purchase you are only buying what is specifically identified and not excluded. If an asset is not listed in the APA, the buyer is not buying it. Make sure the assets you need to run the business are spelled out so you do not discover later that critical equipment or IP was never part of the sale.
3. Seller’s Representations and Warranties
Here the seller makes legally binding promises about the condition of the business and the information provided during due diligence. Common representations include:
- The seller’s entity (LLC or corporation) is properly organized and has approved the sale.
- All financial information provided to the buyer is truthful, accurate, and complete and fairly represents the financial condition of the business.
- All taxes related to operating the business have been paid, and the business is not currently being audited.
- The business assets are owned free and clear of any liens, are properly maintained, and are in good working order.
- The seller owns or has a license to use all intellectual property currently used in the business.
- There are no current lawsuits or pending government investigations against the business.
- The seller is in compliance with all applicable laws and has all permits and licenses needed to operate.
This section is one of the most critical in the APA. It gives the buyer assurances about the condition of the business, and if something turns out to be wrong, it gives the buyer grounds for a lawsuit.
One detail buyers often miss: the representations and warranties must survive for a period of time after closing. The exact length is heavily negotiated, but the APA should state that they survive for at least six months, and often for multiple years. Without a survival clause, these promises may not be enforceable after closing, which means no grounds to sue if something goes wrong.
4. Buyer’s Conditions Precedent to Closing
A condition precedent is a legal term for an event that must occur before the buyer is required to close. If the event does not happen, the buyer does not have to close and is not in breach. Common conditions precedent include:
- The buyer has received suitable financing from a third-party lender.
- The buyer has obtained any permits or licenses needed to operate the business.
- The seller’s lease (or another important agreement) has been assigned to the buyer.
The point of this clause is to make sure every important event that needs to happen before you can run the business actually happens. If financing falls through or the landlord refuses to assign the lease, you can walk away without breaching the APA.
5. Termination Clause
You may think you do not need a termination clause because you are definitely going to buy the business. Circumstances change. Something can turn up in due diligence, or another issue can make the deal impossible. A termination clause lets either party walk away in certain situations:
- Mutual agreement. If both parties agree, the deal ends.
- Buyer dissatisfied with due diligence. Sellers usually insist on a due diligence deadline so buyers do not have an open-ended right to terminate. Dissatisfied before the deadline: you can terminate. After the deadline: you cannot terminate on this ground without breaching the APA.
- Buyer unable to obtain financing, permits, licenses, or contract assignments like a lease. Sellers often insist on a notification deadline. Notify them before that date and you can terminate. Miss the date and it is presumed you can obtain financing, which means you are committed to the deal.
- Breach by either party of any representation or warranty that has not been cured. The cure period is often negotiated.
The harder negotiation is usually about the deposit. In most cases, the deposit is returned to the buyer unless the buyer has breached the agreement or is trying to terminate after a deadline has passed. Make sure your APA spells out when your deposit comes back if the deal terminates.
6. Post-Closing Covenants
Post-closing covenants are promises in the APA that will not be fulfilled until after the business has been sold.
Non-compete and non-solicitation. The last thing you want after buying a business is for the seller to open a competing business down the road or take the customers and employees you just acquired. The APA often requires the seller to sign a non-compete or non-solicitation agreement, or includes those clauses directly. A non-compete prevents the seller from operating a competing business for a set number of years within a defined geographic area. A non-solicitation prevents the seller from taking customers or employees. Both are enforceable in Massachusetts as long as they are reasonably necessary to protect a legitimate business interest. In a sale, that interest is the goodwill and value of the business you just bought, so Massachusetts courts will likely enforce a reasonable clause. For more, check out our earlier video on non-competes or speak with a contracts attorney.
Indemnification. The seller promises to pay the buyer for any lawsuits or losses tied to events from when the seller owned the business: lawsuits based on pre-closing conduct, unpaid taxes the buyer ends up paying, and contract disputes from the seller’s period. It usually goes both ways. The seller will expect the same protection from the buyer for events after closing.
Survival. Like the representations and warranties, post-closing covenants need to survive closing. Your APA should include a specific statement that they do. Without it, you may have nothing to enforce after the deal closes.
Final Thoughts
Buying a business is one of the biggest investments you will ever make. Understanding these six clauses helps you avoid hidden risks and future disputes. You do not need to become a legal expert overnight. You do need to understand the fundamentals so you can ask the right questions and protect your investment.
The information above is not legal advice. If you are buying a business in Massachusetts and need help reviewing or negotiating an asset purchase agreement, contact Bross Law, LLC to book a consultation. We will help you move forward with clarity and confidence.
