Asset purchase agreement: the sections a small business buyer should understand
Short answer
An asset purchase agreement (APA) is the contract that turns your LOI into a binding deal. It lists exactly which assets you're buying and which liabilities you're not, the price and how it can be adjusted, the seller's representations and warranties, how you're compensated if they turn out false, the non-compete, and the conditions that must be met before closing.
Your attorney drafts it, but you should read every section, because it encodes what you learned in diligence.
A good APA reads like a map of everything that could go wrong, with a rule for each. The LOI said what you intended. The APA says what happens when reality differs. Here's what each part does, in the order they usually appear. Not legal advice; your attorney drafts and negotiates the real document.
The sections
1. Purchased assets
A list, usually with schedules: equipment (by serial number where possible), inventory, intellectual property, trade name, phone numbers, website and domains, social accounts, customer lists, contracts being assigned, permits that can be transferred, and goodwill. If it isn't listed, assume it isn't included.
2. Excluded assets
Typically cash, receivables (unless you're buying them), the seller's entity records, tax refunds and personal items. Check that nothing you need to operate is accidentally here.
3. Assumed and excluded liabilities
The heart of an asset deal. Assumed liabilities should be a short, specific list (for example, obligations under assigned contracts arising after closing). Everything else is excluded and stays with the seller. Watch for vague wording like "liabilities in the ordinary course".
4. Price, payment and adjustments
The amount, how it's paid (cash, loan proceeds, seller note), and adjustments: inventory counted at closing, working capital true-ups, prorated rent and utilities, customer deposits you'll honor. See working capital peg.
5. Purchase price allocation
How the price is split among asset classes for tax. Both sides report it on IRS Form 8594.
6. Seller's representations and warranties
Statements of fact the seller stands behind: the financial statements are accurate, taxes are paid, there's no undisclosed litigation, the assets are owned free of liens and in working order, the business complies with law, the lease is in good standing. Every concern from diligence should map to a rep. See representations and warranties.
7. Buyer's representations
Shorter: you're authorized to sign, and so on.
8. Covenants before closing
The seller agrees to run the business normally until closing: no unusual discounts, no stripping inventory, no new long-term contracts without your consent.
9. Conditions to closing
What must be true for each side to be obligated to close: financing funded, lease assigned, licences transferred or issued, no material adverse change, key consents obtained.
10. Indemnification
Who pays if a rep is false or an excluded liability shows up: the claim process, survival periods, a minimum claim size (basket), a maximum (cap), and what backs it, usually a holdback or escrow from the price or a right to offset against a seller note. See holdbacks.
11. Non-compete and non-solicit
Seller agrees not to compete or poach staff and customers for a period and area. See non-competes.
12. Transition services
Seller training and consulting: hours, duration, pay. In SBA deals the seller can consult for no more than 24 months in total.
13. Termination and miscellaneous
How either side can walk before closing, governing law, dispute resolution, notices.
What the lender will look at
If you're using SBA financing, the SOP requires the lender to have all purchase agreements, schedules and amendments. Lenders check that the structure matches the approval: price, seller note terms (and standby agreement), what's being bought, no seller earnout, and seller transition within the 24-month consulting limit. Send your lender drafts early so you don't have to renegotiate after the seller has signed off.
Reading the draft: a short checklist
- Every asset you need to operate is on a schedule.
- Assumed liabilities are listed specifically; everything else is excluded.
- Each issue from diligence maps to a rep, a condition, an indemnity or a price adjustment.
- Indemnity is backed by something real (holdback, escrow, offset against a seller note).
- Inventory and working capital adjustments have a method, a date and a cap.
- The non-compete covers where your customers actually are.
- Closing conditions include financing, lease assignment and licences.
Asset purchase due diligence checklist
In an asset purchase you buy specific assets, not the company, so diligence focuses on whether each asset is really the seller's to sell and free of liens, which contracts, leases and licences can be assigned to you (and which need consent or new applications), how employees will be rehired, and which liabilities stay with the seller. Confirm the asset list in the purchase agreement matches what you inspected, search for UCC liens, and plan for sales tax or bulk-sale rules where your state has them.
Most small business deals are asset purchases. The structure protects you from many of the seller's liabilities, but only if you check what you're actually getting and what you're leaving behind.
The checklist
Assets
- Asset schedule matches what you inspected (serial numbers for equipment).
- Seller actually owns each asset; leased equipment identified.
- UCC lien search; payoff letters and releases at closing. See UCC lien search.
- Vehicle titles and registrations.
- Domain names, phone numbers, social accounts, software licences.
- Trademarks or trade names, if any.
Contracts and licences
- Each needed contract: assignment clause and consent required.
- Lease assignment or new lease. See lease assignment.
- Licences and permits: transferable or new application. See transferring licences.
People and liabilities
- Employee rehire plan, accrued PTO, final payroll by the seller. See employees.
- List of excluded liabilities in the agreement.
- Sales tax clearance or bulk-sale rules in your state.
- Purchase price allocation across asset classes (reported on IRS Form 8594).
Conditions to closing
Conditions to closing are the things that must happen before either side is obliged to close. If one fails, you can walk away without breaching the agreement. Buyers commonly ask for:
- Final loan approval and funding on the terms in your commitment letter.
- The landlord's consent to the lease assignment, or a new lease on agreed terms.
- Required third-party consents to assign key contracts, such as major customers, suppliers or a franchisor.
- Transfer or issue of the licences and permits the business needs to operate.
- No material adverse change in the business between signing and closing.
- Seller's reps still true at closing, confirmed in a closing certificate.
- Payoff letters and lien releases for every secured debt being paid at closing.
Schedules and exhibits to expect
Most of the deal's detail lives in the schedules, not the body of the agreement. Expect schedules listing the purchased assets, the excluded assets, the assumed liabilities (and stating that everything else stays with the seller), the assigned contracts, the employees to be offered jobs, the price allocation, and the disclosure schedules against each rep. Exhibits usually include the bill of sale, the assignment and assumption agreement, the seller note, the non-compete and the transition agreement. Read the schedules as carefully as the agreement. An asset left off the list may not be yours, and a liability added to the assumed list is.
Have your accountant review the price allocation schedule before you sign. It affects your tax deductions for years and must match what the seller files.
Frequently asked questions
Who drafts the asset purchase agreement?
Usually the buyer's attorney, since the buyer is taking on more risk. In broker-led deals the seller's side sometimes produces the first draft. Either way, both sides negotiate it.
What are excluded liabilities?
Liabilities of the seller's business that the buyer is not taking on, usually everything except a short list of assumed liabilities. The APA should say clearly that excluded liabilities stay with the seller.
How long do seller representations last after closing?
That's negotiated as the survival period. General reps often survive for a limited period after closing, while fundamental ones such as title to assets and taxes often survive longer. Your attorney will suggest what's normal for your deal size.
Does the APA have to include a purchase price allocation?
It should. Buyer and seller each report the allocation on IRS Form 8594, and agreeing it in the APA keeps the filings consistent.
Do I avoid all liabilities in an asset purchase?
Mostly, but not entirely. Some liabilities can follow the assets or the business, such as certain tax, environmental or employment obligations, depending on state law. The purchase agreement and diligence still matter.
Do contracts transfer in an asset sale?
Only if they can be assigned. Many contracts and leases require the other party's consent. List every contract you need and check its assignment clause.
Sources
- IRS Form 8594, Asset Acquisition Statement
- SBA SOP 50 10 8.1, Appendix 15 (lender must obtain all purchase agreements and schedules)
- Cornell LII: UCC Article 9 (secured transactions)
- IRS: Instructions for Form 8594 (asset acquisition statement)
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.