We are often asked which is better – a MIPA or an APA?  What is a MIPA (from a business perspective)?  What is an APA? Which is better for your unique mergers and acquisitions situation?

Key Takeaways Regarding the Choice of a Membership Interest Purchase Agreement (MIPA) or an Asset Purchase Agreement (APA):

• a Membership Interest Purchase Agreement (MIPA) is used to transact an ownership interest in an LLC, or to acquire the LLC itself.
• An Asset Purchase Agreement (APA) is a common mergers and acquisitions transaction, where one business is acquiring the business assets of another company.
• The best structure for any mergers and acquisitions transaction in California should be the result of consultation and guidance from the experienced M & A attorneys at the Watkins Firm.  You can trust their proven track record of success in these transactions over their 40+ years of service to the California business, science and tech, real estate and medical / healthcare communities.

When to choose a MIPA!

Generally speaking, the choice to use a MIPA is associated with any acquisition involving a Limited Liability Company (LLC), or a membership interest in an LLC.  If you want to “step into the shoes” of the member/LLC owner, you are able to do so with the Membership Interest Purchase Agreement.  This is especially true when purchasing the LLC itself.  A MIPA allows one to purchase the entire entity including all of its existing contracts and obligations that do not contain a “change of control” restriction within the language of the associated loan document(s).  It also can allow one to preserve most existing contracts while acquiring important licenses, bank accounts, vender contracts, licenses, and various permits.

Pro-Tip: “Always check the operating agreement with regards to any ‘right of first refusal, unanimous consent requirements, or specifications regarding the structure of the MIPA itself.  Remember, if you are acquiring the entity, the LLC itself, you are assuming ownership of not simply the company’s assets, but all of its liabilities and contingent exposures as well.  This requires extensive due diligence, documentation, disclosures, as well as intensive investigation of the financials and other corporate documents.  Much like a stock purchase transaction, the intent of the MIPA may be to preserve the integrity of the company and its present operations and goodwill, without the ‘outside world’ knowing the company has changed hands.

Transferring title to an asset. Well, first of all, the reason you want to do an asset purchase is because they’re buying the actual assets they’re being described, and they’re being sold to you in a manner where you don’t have to worry about all the other problems or secrets this corporation and its shareholders may have an asset purchase, will often entail an escrow. You create an escrow for the company and you send out a notice that I bought this company’s assets. And if you’re a creditor, you have 60 days to come and make a claim. Otherwise, after that I’ll own not only the, the equipment I’ll own, the Goodwill, I’ll own the name, the, uh, IP, everything free and clear. If any creditors claims, when you buy the shares, then you end in a situation where you’re not buying the assets, you’re buying, whatever the shares have power over, and that can be complicated and hard to understand or even know what you’re getting. So from that point of view, and also for the tax advantages of depreciating assets and other things, most people prefer an asset purchase.

We are often asked: ‘so when an asset is encumbered, is it the responsibility of the seller to disclose that? And how do you handle when there are UCCS and encumbrances against an asset.’  

That happens a lot and you provide for what we call carve outs or clauses in the agreement where the money comes in, goes into an escrow account, whether it’s in our attorney trust account or an actual commercial escrow company, like Chicago Title, or First American title. And then you put escrow instructions in and say, ‘okay, when the money comes in, the escrow, officer’s instructed to pay off this creditor or that creditor,’ or you also have a carve out, and you’ll enter into a new agreement with the vendors or the creditors to keep doing business with them. So all those types of things are included when you do an asset purchase, or APA.” – Dan Watkins, Founding Partner

When to Choose an APA!

An Asset Purchase Agreement or APA is a much more structured document, focused intently on the item(s) being sold, what is or is not included in the transaction, and how the process of the asset purchase is to be structured so that the interests of both the seller and the buyer are protected.  We are talking about specifics here.  “This” asset with ‘that” unique identifying number, a specific or legal description, as well as a general categorization (is it real estate, a group of customers, vehicles, inventory, accounts payable or receivable?).

Liability is one of the principle areas of focus for an Asset Purchase Agreement.  Liabilities can take many forms including a loan against the asset(s), unpaid taxes, associated contracts, lawsuits, leases, other debts of the entity covered by a general “all assets of the company” type of obligation.  The “price allocation” is very important from a tax point of view and will have an impact on both the buyer and the seller after the transaction is completed.

How is payment to be made.  Is it an installment purchase, or a single, lump-sum payment?  Are there “earnouts” or “commissions” or additional earnings or payments based upon some measure of performance?  What are the representations and Warranties?  Are they complete?  Accurate?  Is there clear title to the asset(s) one is attempting to acquire with the APA?

The Question of Which is Better – a MIPA or an APA Is Actually Quite Legally and Financially Complex

The question we are often asked: “which is better – a MIPA or an APA?” – is actually quite fact specific.  The issue(s) associated with the transaction can be legally and financially quite complex.  This is why it is important to work with the experienced Mergers and Acquisitions attorneys at Watkins Firm.  Put our 40+ years of proven experience and successful outcomes across thousands and thousands of M & A transactions on your side.  There are substantial risks in a MIPA or APA transaction.  There are also important gains to be made and business opportunities to pursue.  We want to help you to accomplish your goals, and move forward with confidence and a successful completed transaction.

We invite you to review our podcast Episode 13 – Mergers and Acquisitions, as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.