9 Common Red-Flag Mistakes in Asset Purchase Agreements

Asset Purchase Agreements (APAs) are the commonly used documents in commercial transactions, such as deals involving purchases of shares, commodities, real estate and businesses.

To successfully execute any deal you need the protection of a well-drafted Asset Purchase Agreement; however, often buyers or sellers do not take even the basic steps that are required to protect their own interests.

Below are 9 “red flag mistakes” found in many Asset Purchase Agreements:

1 – Doing a Deal with the Wrong Person

The most proficiently drafted APA in the world is useless if you sign it with an incompetent person or fraudster. This may seem obvious, but many people engage in deals without doing crucial due diligence, such as reviewing books and records for the last 5 years, interviewing partners and customers, checking if the business is current on taxes, and checking if there are litigations against the business or the seller.

One of the most important things a buyer should do is understand who the seller is. The same rule applies to the seller as they can also be doing business with a deceitful buyer.

2 –Essential Parties Are Not Part of the Agreement

Often buyers will sign an APA with a company when in reality another company (or shareholder) is the actual owner of the assets being purchased. On the other hand, sellers often engage in a contract under which a company is the buyer and makes final commitments to the seller, but the seller does is not aware until it is too late that the company is merely a shell company with no assets to satisfy the commitments. It is vital to do full due diligence to make sure people really are who they say they are.

3 –Failure to Address Conditions Precedent Essential to the Deal

Conditions Precedent are events that must be resolved before the transaction can be completed. Buyers and sellers have to identify all these conditions and make sure they are all addressed properly in the agreement.

4 – Failure to Stipulate a “Long Stop Date”

Typically, certain conditions have to be satisfied before closing. What happens if the time for meeting the conditions or obtaining all necessary approvals goes from weeks to months? In this case, buyers and sellers would need to have a “Long Stop Date” in their Asset Purchase Agreement so they can exit the transaction if the delay becomes unsustainable for them.

6 – Failure to Specify Closing Requirements

An Asset Purchase Agreement should specify all the documents to be provided and all actions to be taken at closing.

7 – Failure to Protect Against Competition

Buyers should consider whether the APA should contain contractual terms preventing the seller from competing with them, or stealing customers, suppliers and/or employees for a specified period of time after closing.

APAs should always contain confidentiality agreements, non-compete agreements, and non-solicitation agreements.

8 – No Effective Dispute Resolution System

In the road to closing, arguments over money and adjustments are very common. The APA can ease these obstacles by providing for independent experts to provide advice on issues in dispute and arbitrate if needed.

9 – Not Hiring a Lawyer to Review, Negotiate, and/or Draft the Asset Purchase Agreement

Asset Purchase Agreements are complex documents that require the input of an experienced and specialized attorney who can not only draft the contract but help the parties negotiate the deal as well. Many people underestimate the importance of a lawyer during the negotiation of an asset purchase deal; however, 99% of the time they regret doing so. Hiring a professional to review, negotiate and/or draft the Asset Purchase Agreement is the very first step towards closing – do not skip over it.

At Jurado & Farshchian, P.L., our business attorneys make a living out of taking care of your unique needs. Our firm represents clients in many types of businesses, in various industries all over the world, and we pride ourselves on providing personalized legal services you will not get anywhere else. We are dedicated to protecting the interests of each and every one of our clients. Let us show you how our firm can help you protect your interests in an Asset Purchase Deal. All you need to do is call us today at (305) 921-0440  or email us to Romy@jflawfirm.com.