The purchase and sale of a business in Ontario can be a significant financial and legal transaction. If you want to expand your business by taking over another business, how you will acquire it would be a serious consideration for you. Typically, there are two primary ways used for such transaction: asset purchase and share purchase.
What is An Asset Purchase Agreement?
Asset purchase involves the buyer acquiring certain assets and liabilities from the seller. This method is preferred by buyers since it allows them to select which assets they want while reducing the risk of unknown liabilities. However, it is a complex process that includes legal and financial implications. Therefore, it is crucial to understand the elements that needs to be considered during an asset purchase.
During an asset purchase, a comprehensive list of included and excluded assets of the business sale is created. This list should include specific representations, warranties, and terms under which buyer and seller are acting while entering the transaction.
What Should be Included in an Asset Purchase Agreement?
When drafting an asset purchase agreement, the focus is on outlining relevant assets and matters that need to be addressed during the transaction. This will include the actual assets as well as any documents, agreements and declarations that are essential for the successful completion of the transaction.
Some of the key elements that an asset purchase agreement should contain are as follows (non-exhaustive):
- Name of Seller
- Name of Buyer
- Closing date
- Included Assets
- Excluded Assets
- Purchase price
- Assumption of Liabilities
- Valuation of inventory
- Representations and warranties from Seller
- Representations and warranties from Buyer
- Environmental Matters
- Conditions precedent to closing
- Access to books, records and real property
- Survival of representations and warranties
- Non-competition agreement and other agreements
- Operation of business until closing
- Documentation to be delivered on closing
- Governing Laws
Due diligence is a critical part of asset purchase transactions since it pertains to the fundamental stages of decision making. Purchasers should conduct due diligence to ensure that they are fully aware of any risks associated with the assets being sold. Certain key elements of due diligence are reviewing financial statements, assessing the financial conditions of the assets, and verifying the ownership of assets.
In addition to that, vendors should also conduct a due diligence to ensure that they are aware of any encumbrances or liabilities associated with the assets being sold. In certain cases, vendors might have to provide warranties and representations regarding the assets to protect themselves from potential legal liabilities.
The primary objective of a purchase agreement is to provide an accurate depiction of the assets involved in a business transaction. Therefore, it is essential to have a well-drafted agreement that can prevent common issues potential conflicts on assets or payments.
To ensure that all critical aspects are covered, seeking legal guidance from a corporate lawyer might be helpful. Having a lawyer involved in reviewing your purchase agreement or assist you with the transaction, can help both parties arrive at a mutual understanding and ensuring that all parties interpret the transaction and terms in the same manner, which will provide both parties with peace of mind moving forward.
If you need a Toronto corporate lawyer, contact us today and find out how we can be of help with your asset purchase and sale transaction.
The information provided above is of a general nature and should not be considered legal advice. Every transaction or circumstance is unique, and obtaining specific legal advice is necessary to address your particular requirements. Therefore, if you have any legal questions, it is recommended that you consult with a lawyer.