What is the Difference Between a MIPA and an APA in a Business Transaction?

What is the difference between a MIPA and an APA when you are attempting to buy into or part of an existing business?  Which is the best strategy to use for a California business transaction?  Why is it important to work with the experienced, proven mergers and acquisitions attorneys at the Watkins Firm?

3 Key Takeaways about the Difference Between a MIPA and an APA:

• A MIPA is a Membership Interest Purchase Agreement, used to purchase the ownership interest of a member in a Limited Liability Corporation (LLC).
• An APA is an Asset Purchase Agreement, used to purchase the specific asset(s) of a business entity.
• The determination of when to use a MIPA, an APA, or another form of contract requires the experience of a proven mergers and acquisitions attorney.

What is the Primary difference Between a MIPA and an APA?

A Membership Interest Purchase Agreement is the primary contract used to acquire a membership interest in a Limited Liability Company or LLC.  “Members” are owners, much as “shareholders” own shares of stock in a corporation.  There are 3 primary occasions when a MIPA is the proper business contract to control an acquisition:

1. When an existing LLC is bringing in new investment, and offers a membership in return for that investment.
2. When an existing member in an LLC is required or chooses to sell their interest in an existing LLC.
3. When a single owner LLC is being sold to another person.  If an LLC with multiple owners is being sold, multiple MIPAs may be required to effectively govern the acquisition. When you buy the entire entity (LLC), you acquire the assets, liabilities, and existing contracts (including employment agreements with existing employees.  These contracts need to be reviewed by your experienced business contract attorney at the Watkins Firm to ensure they are enforceable and reflect desirable terms.

An Asset Purchase Agreement (APA) is Used to Acquire Specific Assets of an Existing Business, Company, LLC, or Corporation

There is a substantial difference between and MIPA and an APA, depending upon the goal of the transaction itself. An Asset Purchase Agreement, APA,  is used to acquire the specific assets of any corporate entity.  An asset purchase transaction must be carefully structured to ensure our client’s interests are protected.  The key to the transaction is clear title, representation and warranties, management of any underlying loans or liabilities, proper notification to associated creditors, and elimination of risks due to minority investors/members/shareholders’ interests.

Obviously, the interests of the buyer and the seller are quite different.  How will purchase price be allocated from the perspective of amortization and/or tax basis and depreciation?  What are the payment terms?  Are there any assumed liabilities or existing liens that must be cleared or assumed as part of the transaction?  What period of time should be established to ensure the buyer can discover any hidden issues (often referred to as the “survival period,”).  The seller will want to make sure this time is limited, as are all sources of post-sale contingent liability.

In APA transactions, a covenant of confidentiality, protections such as a refusal to directly compete or solicit, as well as employment-related contracts and issues must be thoroughly vetted and documented, while ensuring regulatory, labor law and benefit compliance.  Transfer documents such as an employment-related agreements, IP assignment contracts, security instruments, and purchase contracts must be properly formatted.

The Watkins Firm brings 40+ years of experience serving the business, science and tech, real estate and medical / healthcare communities here in San Diego and across California.  We add experience, skill, proprietary contracts and due diligence checklists, and a proven track record of successful asset purchase transactions to your side of the equation.