ASSET PURCHASE AGREEMENT BASICS
Asset Purchase Agreement
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 asset 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 assts 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.
- Excluded Assets
A well-drafted Asset Purchase Agreement shall define Included and Excluded Assets in the sale of the Franchise or Business. Excluded Assets typically will include assets owned by the Seller such as accounts receivable and credit card company payments relating to the Business or Franchise prior to closing. Furthermore, Excluded Assets are assets that the Seller does not have the rights to transfer because the Seller does not own the assets. These assets include such as leased equipment, utility deposits and other deposits including any 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 and 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
An Assignment of Rights is the rights and obligations as set forth in a franchise agreement or business agreement. 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 or more (or less) 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
Good Will $100,000
Total Asset Purchase Price $630,000
- Real Estate Lease Assumption
This paragraph addresses whether the Buyer will be assuming a new lease or 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)
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 closing. The Seller will transfer to Buyer all books, records, files, materials, correspondence and written materials and/or electronic data relating to the Assets. 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 filed 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 (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 (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 Agreement invalid.
- Dispute Resolution
This paragraph addresses how disputes will be resolved and the appropriate jurisdiction and venue for disputes.
EXPERIENCED ASSET PURCHASE AGREEMENT LAWYER
Sean Robertson is an Attorney serving Naperville, Shorewood, and Yorkville, Illinois and their surrounding areas. Attorney Robertson is a skilled and trusted franchise and business attorney. Unlike most business attorneys, Attorney Robertson has a strong tax and asset protection background. Moreover, Attorney Robertson is a fellow entrepreneur and business owner. Attorney Robertson is a DePaul University College of Law Graduate and may be reached at 630-780-1034.