An Asset Acquisition Agreement (APA) is the most typical agreement used in commercial transactions, such as those involving the purchase of commodities, shares, enterprises, or real estate. Contracts of this kind are critical to corporate activities.
To properly complete any sale, you need the protection of a well-drafted APA, yet many buyers and sellers fail to take even the most basic procedures to safeguard their own interests.
The following are the top ten “red flag mistakes” we find when buyers or sellers contact us after a transaction has been completed and they want to rescue their money or assets, or otherwise engage in “damage control.”
Table of Contents
1. Making a transaction with the incorrect person
The best-written APA in the world won’t help you if you sign it with a liar or an incompetent. This may seem apparent, yet many individuals enter into transactions without doing necessary due diligence, such as:
a five-year evaluation of books and records
customer and partner interviews
checking to see whether the company’s taxes are up to date
determining whether or not there is any lawsuit pending against the Seller or the company
ensuring that you understand debt – both secured and unsecured debt
It all boils down to knowing who the Seller is. Sellers might also be lead down the rabbit hole by a buyer who is only looking for a good bargain. It is critical for sellers to get evidence of finances and references indicating their capacity to carry on the sale as soon as possible.
2. The APA Excludes Essential Parties
Buyers often sign an APA with Company A when, in actuality, Company B (or a Shareholder in Company A) owns all or part of the assets being acquired. Sellers often enter into contracts in which Corporation C is the buyer and makes large final obligations to the seller, but the seller does not aware until it is too late that Company C is really a shell company with no assets to satisfy the pledges. It is critical to do thorough due diligence and ensure that persons are who they claim to be. Before finishing a deal, I believe you should always meet in person as buyer and seller and look each other in the eyes.
3. Failure to identify and address critical pre-conditions to the transaction
Criteria precedent are the conditions and circumstances that must be met before a transaction stated in an APA may be finalised. Any buyer or seller must identify all of these preconditions and ensure that they are handled appropriately in the APA. The following are critical conditions to include:
payment of the seller’s obligations
permission of a third party
crucial personnel transfers
banking authorizations
permissions and approvals from relevant authorities
As the Buyer, you may place money in escrow for the transaction, much as when you buy a property, and that money will remain in escrow until all of the deal’s preconditions are satisfied.
4. Failure to provide a “Long Stop Date”
Typically, certain requirements must be satisfied before the transaction may be completed. What if the time it takes to meet requirements or acquire approvals extends from weeks to months? In this instance, buyers and sellers should include a “Long Stop Date” in their APA so that they may back out if the wait becomes unbearable for them. If critical preconditions are not satisfied by this extended deadline, one or both parties may walk away from the transaction. Again, this may be an Escrow requirement, and the Escrow agreement might include all of these pre-conditions as well as a deadline.
5. Inability to Agree on Required Financial Adjustments
Buyers may strive to protect themselves in certain transactions by inserting a post-acquisition price adjustment. Following the conclusion of the transaction, the buyer’s accountants finish the books and establish the company’s net assets to assess whether the amount paid at completion was more or lower than agreed. If the price was more than the value, the buyer will be compensated with a reconciliation payment. The “locked-box” strategy, in which the seller makes a comprehensive and explicit promise as to the worth of the business’s net assets at closing, is an alternative to the post-close price adjustment. If the company experiences significant losses or the sellers withhold dividends, any buyer who does not have these protections would be financially exposed. Frequently, Buyers and Sellers complete a basic APA and fail to address the fact that the value of the assets has changed. Buyers should really consider this problem and incorporate it in their APA.
6. Failure to Specify Closing Requirements
An APA should explicitly outline all activities to be performed as well as any documentation to be supplied at the conclusion. Discharge of banking facilities, transfer of customer and financial information, changing of bank and regulatory signatories, original papers, and getting regulatory permissions are some examples. This also covers any escrow agreements’ rules. The importance of communication and clarity cannot be overstated.
7. Failure to Protect Against Seller Competition
Any buyer should assess whether it is acceptable for the APA to include contractual restrictions prohibiting the seller from competing with or courting customers and suppliers, as well as from poaching company workers for a certain length of time following completion. All APA agreements should contain confidentiality clauses, non-solicitation clauses, non-compete clauses, and IP protection in general. It’s always better to be safe than sorry.
8.Failure to Replace Signatories
Buyers often ignore the necessity to alter the signatures on critical banking and business accounts. Third parties must be advised of the new owners and signatories in a timely manner. All accounts for websites, marketing, social media, bank accounts, memberships, subscriptions, databases, and cloud services must also be transferred. It is preferable for the APA to contain clauses requiring the Seller to help the Buyer with transition issues for a certain amount of time, say 3 to 6 months depending on the complexity of the transaction and company operations.
9. There is no simple and effective dispute resolution system.
Arguments over money and adjustment are usual in the run-up to closure. The APA may help to alleviate these challenges by allowing independent specialists to undertake appraisals, offer expert advise on topics in dispute, and arbitrate if required. Prior to drafting the actual APA, I often ensure that the Parties agree on value and the technique for arriving at valuation. This resolves a slew of issues towards the end.
10. Attempting to Save Money on Lawyer Fees
This is unmistakably my own rant. I used to spend a lot of time cleaning up the problems made by customers who utilised outdated internet forms for their APAs. They required me to clean up the mess once the deal was completed. This is because parties often obtain “ready-made” contracts from the internet, alter a form from a previous transaction, or attempt to construct the contract themselves. Make certain that the APA is reviewed by a specialised lawyer. Lawyers’ expenses for examining APAs are often a minuscule fraction of lawyers’ fees for litigation, or catastrophic financial losses from a defective contract or a transaction that should never have been done in the first place. As much as we attorneys want to make a livelihood by healing your mistakes, we would much prefer make a living as the general counsel for your new company by proactively preventing messes.