What are the key sections of an asset purchase agreement?

A purchase agreement is where a letter of intent turns into final terms. BDC, the federal Crown lender, describes the stage as the time when the parties make final decisions about whether to go ahead, at what price and on what conditions. Its guidance on negotiating the agreement walks through the price structure, representations and warranties, covenants, closing conditions and indemnities. This page follows that list from the buyer’s side. Every deal differs, so the sections below are things to look for in a draft, not a template.

Price structure and what is being bought

BDC notes that parties decide how much of the price is paid on closing and how much is held back in escrow or made subject to conditions. In an asset purchase, also check that the agreement lists the specific assets and any liabilities the buyer is taking on, and ask what happens to anything not named. Ask your lawyer how the asset purchase agreement in your deal handles contracts and leases.

Representations, warranties and covenants

In the representations and warranties, BDC says the vendor formally describes the condition of the business and discloses issues it knows about, such as litigation listed in a schedule. The parties also negotiate who carries the risk of what was disclosed. BDC describes covenants as actions the buyer and vendor agree to take before and after closing, such as the vendor running the business as usual until closing, or a non-compete. It separately mentions ancillary agreements that can accompany the main agreement, covering things such as employment for key employees and a transitional services agreement. Read each covenant for what it covers and how long it lasts.

Closing conditions

BDC explains that most acquisitions have a gap between signing and closing, the date the buyer takes possession. The closing conditions are undertakings the vendor agrees to complete during that gap for the deal to close. Ask what happens if a condition is not met by the closing date, and whether either side can walk away.

Indemnities

BDC calls this a hotly negotiated section. It sets the compensation the vendor owes if disclosures turn out to be inaccurate or covenants are not respected. BDC adds that a seller is not liable for misrepresentations forever, and that its liability is typically capped. Ask how long claims can be made and what the indemnity cap covers.