What are some of the potential risks of an asset purchase agreement in a San Diego or California business transaction? Why do so many asset purchase contracts wind up in litigation? Why is it important to seek the advice and counsel of the business mergers and acquisitions attorneys at the Watkins Firm if you are considering the purchase of some of the assets of an existing business?
Key Aspects of the Potential Risks of an Asset Purchase Agreement (APA):
- The central challenges associated with an Asset Purchase Agreement or APA include ensuring clear title to the assets in question, genuine disclosures, representations and warranties, and the removal of any liability associated with the asset(s) in the transaction.
- Due diligence is the key to any mergers and acquisitions transaction. Look for a legal partner who can provide extensive checklists and contracts for the transaction based upon decades of successful experience in thousands of APA transactions.
- Be aware of the potential for any hidden or potential successor liability claims associated with the assets to be acquired.
The Primary Challenges Associated with an Asset Purchases
What are some of the potential risks of an asset purchase agreement? The primary challenges faced by the parties in an asset purchase transaction center on the passing of clear title to an asset, disclosure of the condition of the asset(s) to be purchased and unforeseen contingent liabilities associated with those assets. Unfortunately, recent Court decisions here in California and across the nation have exposed businesses in an asset purchase to litigation related to the debts and liabilities of the seller.
There are many valid legal arguments for attaching the buyer in an asset purchase to the woes of the seller. Creditors often attempt to argue that the buyer assumed the seller’s liabilities in either an expressed or implied manner. This is especially true when a de facto merger is attempted to be disguised as an asset purchase. Your Watkins Firm mergers and acquisitions attorneys have almost four decades of experience in thousands and thousands of APA transactions. We will work to protect your interests, and help to build in protections against unforeseen risks and any attempt by the seller to defraud their own creditors.
Due Diligence is the Key to an Effective Asset Purchase
The potential risks of an asset purchase are the types of issues which our experienced acquisition attorneys thoroughly examine during the course of due diligence. Due diligence requires professional assessment of the assets to be purchased, underlying encumbrances or financing, condition of the asset(s) and any potential contingent liabilities which might threaten the asset purchase transaction down the road. Identification of the assets including serial or other identifying numbers, a statement of the condition of all assets by the seller and full disclosure of any known defects. If there are existing encumbrances or liens, it is important to begin negotiations with lenders and/or lien holders early in the process to maximize the opportunity for a successful transaction.
Pro-Tip: “What are some of the key aspects of an APA (Asset Purchase Agreement) transaction. You’re transferring title to an asset. The reason you want to do an asset purchase is because you intend to buy the actual assets that are 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. We help to create an escrow for the transaction, and send out a notice that you have bought a company’s assets. And if you’re a creditor, you have 60 days to come and make a claim. Otherwise, after that you’ll own not only the equipment, you’ll own any associated Goodwill, own the name, the IP, every asset associated with the transaction free and clear.
What happens when an asset is encumbered? Is it the responsibility of the seller to disclose that? And how do you handle transactions when there are UCCS and encumbrances against an asset?
This is quite common. We’ve done literally thousands and thousands of these transactions. When that happens, 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 our trust account or an actual commercial escrow company, like Chicago Title of First American Title. And then you put escrow instructions in and say, ‘okay, when the money comes in, the escrow, officer is instructed to pay off this creditor or that creditor, or you also have a carve out, and/or 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.
In each of these transactions, the buyer and the seller each have advantages and disadvantages. It’s harder to be a buyer. It’s easy to be a seller. A buyer has the harder task because the buyer gives money and the buyer has to verify what they’re acquiring. And that’s when we come up with a term called schedules, depending on how expensive or large a transaction is, you’re going to have more schedules (if you’re represented by an experienced Watkins Firm APA and M&A attorney). We have a proprietary library of proven transaction schedules and documents we custom tailor to the transaction at hand in order to organize and identify the assets within the transaction at hand. For example, you have your real estate schedules, you’ll have a disclosure by the seller of what they own and all the contracts they’ve signed with respect to real estate. You’ll have equipment schedules, and all transaction assets will be listed, and and the seller will have to provide full, accurate disclosures. We account for cash value, and you’ll have accounts and good will and taxes and all the things that you want to do as a buyer in an organized fashion to review a) to make sure you know what you’re getting and b) to make sure you get representations from the seller that this is what (the seller is) giving you in case later on, it turns out they weren’t telling the truth.” – Dan Watkins, Founding Partner
Managing the Potential Risks of an Asset Purchase Agreement
There are many precautions to consider when managing the potential risks of an asset purchase agreement. Your Watkins Firm attorney works to ensure the seller can provide clear title. If the asset to be purchased is a customer base or existing service agreements it is important to preserve existing Goodwill while identifying any past, present or future issues or imperfections which might interfere with the successful transfer of the asset or its value in the future, as well as any contingent liabilities.
The Watkins Firm works to make sure any asset purchase agreement protects our client’s interests. If our client is the buyer, we work to indemnify our client from any potential successor liability claims or non-assumed obligations. Cash transactions provide additional protections and in some cases insurance may be required to extend need protections. When we represent the seller, we work to ensure all disclosures, representations, and warranties are as accurate as possible, while removing any contingent risk for seller and buyer alike.
The San Diego business attorneys at the Watkins Firm have 40+ years of experience representing buyers and sellers in APA and mergers and acquisitions transactions in the business, science and tech, real estate and medical / healthcare communities here in San Diego and across California. Our work is based on thorough due diligence, proven contracts, and successful strategies based upon thousands and thousands of APA transactions. This experience and legal skill helps to anticipate, manage, or eliminate the potential risks of an asset purchase while facilitating a smooth 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.
Meet Daniel Watkins:
Daniel W. Watkins is a true people person who sincerely listens. He cares deeply about what others are going through. Dan enjoys digging into the facts and finding creative solutions to problems. He contributes his insights candidly and constructively.
Dan’s interest in people make him deeply invested in every relationship and his exuberant personality makes him a true litigator. Dan fights for his clients with a fierce and calculated commitment.
Dan has practiced in the areas of business, medical practices and healthcare business, high tech/science, real estate and employment defense law since 1987. He is a trusted litigation strategist and true trial attorney with over 50 jury and bench trials to his credit. Dan has successfully represented both large companies and individuals and achieved substantial victories in well-publicized trials throughout California and the U.S.
He is experienced in business and corporate formation and administration, as well as all forms of alternative dispute resolution, including binding arbitration and mediation.
THE ROAD TO BECOMING A BUSINESS LAWYER AND LITIGATOR
Dan has almost 40 years of experience working with, for and against some of the largest insurance companies in the country. He has successfully tried and litigated cases in the areas of Healthcare Compliance, Commercial Litigation, Unfair Business Practices, Fraud, Breach of Contract, Battery, Premises Liability, Product Defect, Medical Malpractice, Discrimination, Sexual Harassment, Construction Defect, as well as Unfair Competition, Defamation, and Trade Secrets.
In December 2003, Dan commenced litigation against Health South Surgery Centers-West, Inc and its’ subsidiaries, exposing the company’s extensive mismanagement and misconduct of its’ surgery centers. Dan has also been asked by some of California’s largest municipalities and corporations to conduct legally required investigations into matters involving alleged employment discrimination and harassment.
