If your company is in the planning stages or in the middle of a merger and acquisition (M&A) with another business, you will need to procure an asset purchase agreement (APA).
An asset purchase agreement serves as a legal contract between the parties. These documents establish all terms and conditions associated with the purchase of another company’s assets.
Learn more about using an asset purchase agreement and download an asset purchase agreement template below.
What is an Asset Purchase Agreement?
An asset purchase agreement is a legal contract between a buyer and a seller that outlines business assets’ sales. Most asset purchases are made between one company and a business selling off its assets. In some circumstances, you could also deal with the individual shareholders if a share sale is used to make the asset purchase instead.
For a buyer, an asset purchase agreement is preferable to share sales because companies pick and choose which assets they wish to acquire without taking on the other company’s business liabilities (which could be considerable).
However, some deals may require taking on some of those liabilities, so the company making the sale generally prefers to engage in a share sale.
Understanding Capital Gains
Capital gains refer to the profits made on the sale of an asset if you sell it for a higher price than you purchased it. For example, if you purchase property valued at $100,000, and you sell it for $150,000, you have capital gains of $50,000 that you need to report.
Capital gains are divided into short-term capital gains and long-term capital gains. If you hold the asset for one year or less, the value of its capital gains will be taxed as ordinary income.
If you hold the assets for longer than one year, any capital gains are taxed as long-term capital gains. The tax you have to pay on it depends on your overall income.
- If your overall income is less than $78,750, you do not have to pay any capital gains taxes on it.
- If your income is between $78,750 and $434,550, your capital gains taxes are 15 percent.
- If your income is greater than $434,550, your capital gains taxes are 20 percent.
Assets Eligible for Capital Gains
Assets eligible for capital gains include: 
- Stocks and bonds
- Real estate (residential or investment)
- Household furnishings
- Personal property
- Precious metals (gold, silver, etc.)
When to Use an Asset Purchase Agreement?
You should use an asset purchase agreement when buying or selling business assets. If you are the purchaser, you will theoretically get a better deal by handpicking the assets that best serve your business. For instance, if you own a concert venue you want to expand, you might purchase all the seats from a shuttered theater but have no interest in taking ownership of its popcorn machine and candy display cases.
All the details of the proposed sale must be hammered out between the two companies’ principals and/or the company’s shareholders before the asset purchase agreement is drawn up.
You can use an asset purchase agreement in a number of situations, such as:
- To limit purchases to business assets, as opposed to the business itself
- As part of a larger business purchase
- When purchasing specific assets
- In joint venture situations
- When the purchase of a specific asset isn’t covered by other purchase agreements you have with a seller/buyer
Asset purchase agreements are typically used to purchase:
- Intellectual property
What To Include in an Asset Purchase Agreement?
So, what should be included in an asset purchase agreement? There are several sections included in an asset purchase agreement template. They include:
1. Demographics and Date
You need to include basic demographic information about the sellers and buyers. You should include the names of all sellers and buyers involved, as well as where they are located. Do not forget to include the date of the agreement as well.
2. The Asset Information
You need to include information about the asset being sold. For example, if there is real estate being purchased, you need to include the address of the real estate involved in the agreement.
3. Purchase Price and Payment Information
You should specify the purchase price being agreed to by the buyer and seller. You also need to specify how payment is going to be made. A few options include cash, check, credit card, or wire transfer. Do not forget to include any money that the buyer is being credited with prior to the issuance of the final payment, the amount of money due when the agreement is signed, and any additional installments that will be made down the road.
Do not forget that there will be some taxes that follow this transaction. You need to specify who is going to be responsible for paying the taxes and when those taxes are going to be paid. A few examples of taxes that might be paid include sales taxes and property taxes.
5. Ownership Transfer
You should specify when the buyer is going to take possession of the property from the seller. You should also specify that the seller is responsible for keeping the property in its present condition until that time. The seller should also specify that the asset is being sold without any liens or liabilities against it. If there are liens or liabilities on the property, the buyer needs to be made aware of them and agree to take possession of the property with those intact or paid off.
6. Governing Laws
The agreement should also specify which location’s laws are governing the execution of this transaction.
7. Legal Disputes
If there is any dispute related to this agreement, the agreement should specify the court system that will be responsible for resolving these disputes. The agreement should also specify whether mediation or binding arbitration will play a role in resolving any of these disputes.
Asset Purchase Agreement Sample
Below you can download an asset purchase agreement in PDF or Word format:
Examples of an Asset Purchase Agreement
There are several situations where an asset purchase agreement might be useful. For example, if you are acquiring another business, you will need an asset purchase agreement to formalize the purchase price, the nature of the merger or acquisition, and when the agreement is going to be executed.
Or, if you are interested in purchasing a specific portion of the business, such as one department or a chunk of real estate, an asset purchase agreement can be beneficial. They can specify which assets you are purchasing and which assets you are leaving behind.
Advantages and Disadvantages of an Asset Purchase Agreement
It is important to consider the pros and cons of an asset purchase agreement. Some of the biggest advantages include:
- You are in control of how the agreement will be structured.
- You can avoid problems related to minority shareholders.
- It is possible to sell assets at a fair market value.
- You only attract serious buyers and sellers.
There are a few disadvantages as well. They include:
- You will have to go through the process of a title exchange.
- Certain employment contracts might need to be reviewed and renewed.
- Permits and licenses might require reapplications.
Consider these pros and cons carefully before moving forward.