The Asset Purchase Transaction: A Guide to Buying a Business

How an Asset Purchase Works

When considering the acquisition of a business,
understanding the nuances of asset purchase transactions is crucial. This guide
aims to navigate you through the intricate process of buying a business through
such a transaction.

An asset purchase transaction involves buying the individual
assets of a business, such as its equipment, inventory, goodwill and
intellectual property, rather than buying the business entity itself (i.e.
rather than a share purchase). An asset purchase transaction offers several
advantages, including the potential to selectively acquire assets, avoid
inherited liabilities, and often enjoy favorable tax treatment.

Step 1 – Purchase Agreement

When clients engage me to assist them with an asset purchase transaction they usually already have a target business and seller lined up and have had at least some preliminary discussions. Sometimes they even have a purchase and sale agreement completed and signed.

This first step in the legal process is therefore getting the purchase and sale agreement in place (or reviewed). If there is one already prepared before legal involvement, my job will be to review it and provide comments to you. Depending on the agreement, timing and circumstances, there may or may not be a recommendation for amendments to be made. If this is the case, I may draft an amending agreement, to amend the agreement already in place.

The agreement (and any amendments) will set out the terms and conditions under which the purchase transaction will proceed and eventually close. This will contain the understandings, agreements and assurances (as well as necessary representation and warranties by the seller and purchaser).

Step 2 – Due Diligence

Once the agreement is done and the parties have agreed on the terms in which the purchase and sale will take place, the due diligence begins. The due diligence stage is the investigation stage to ensure that the terms and conditions in the purchase agreement can be delivered or fulfilled (for example, if the purchase agreement says that the assets will be sold without liens, the lawyers will investigate if there are any known liens). It is important to know that you are getting the assets you will pay for, and on the terms you agreed to and this stage is for making the inquiries and verifications to ensure that it can be done as you will be expecting.

During this phase, your lawyer will conduct a number of searches which typically include steps to verify the proper legal name of the seller and principals (if an incorporated entity). We will also investigate whether there are any claims against the company which could have the effect of encumbering the assets (to encumber the assets essentially means to put a lien or right to claim on them, which may rank in priority to your ownership claim if not properly dealt with). We will also check any personal property registrations against the assets to make sure they haven’t been pledged as security, or if they have, to bring to your attention, and then perhaps the seller / or the seller’s lawyer.

Step 3 – Pre-Closing

This stage often happens concurrently with the due diligence stage. During this stage the lawyers will be exchanging closing agenda’s, drafting necessary closing documents, arranging the payout / release of security, etc, as applicable which was uncovered from the due diligence searches. They will also meet with clients to have required resolutions, promissory notes and other documents signed as required. If there is financing involved, they will provide all required information and documents to the lender.

Step 4 – Closing

Closing is the day in which the agreement and change of ownership closes, subject to any post-closing issues that were agreed on, or have to be dealt with. On closing day, the assets become yours, as the purchaser, and the purchase price is paid to the seller.

During the closing process, the lawyers will exchange the closing deliverables. These could include money, keys, documents of title, etc.

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