In general, there are two methods of acquiring a business: a straight purchase (often called a stock purchase) or an asset purchase. One of the main advantages of an asset purchase transaction is the buyer’s ability to avoid taking on or accepting any of the seller’s liabilities. Indeed, obtaining assets needed or useful to your existing business (or to a start-up business) that are free and clear from any attached seller liabilities is often the main goal of structuring a deal as an asset purchase. In common parlance, the buyer’s goal is to avoid “successor liability,” which can happen if creditors and other claimants convince a judge — in some future-filed litigation — to deem the transaction as a straightforward business purchase.

If some future judge is asked to decide about successor liability, a very important factor is whether, in reality, the buyer took control of “substantially all” of the seller’s assets. In turn, this factor is impacted by how the Asset Purchase Agreement (“APA”) is drafted. The APA must, of course, be entitled to an “Asset Purchase Agreement.” More importantly, careful focus must be on how the “assets” are defined and the APA should clearly identify the fact that NOT all of the assets are being transferred to the buyer. The buyer should be purposeful in leaving assets with the seller, and the purchase price should reflect that fact.

Thus, one good drafting strategy is to clearly set out the assets and liabilities in four parts:

• Assets included
• Assets excluded
• Liabilities assumed by the buyer and
• Liabilities retained by the seller

Each of these parts should have some substantial content. It is useful to include various “assets” that the parties know to be nonexistent, such as “office furniture” or “real property.” This all helps to bolster the fact that this transaction IS an asset purchase agreement when/if the transaction is reviewed in some future-filed litigation.

For example, if we think of a hypothetical commerce asset purchase, the APA should have these four sections. The “assets included” might be things like the seller’s website, the domain name, actual inventory located at a certain address, etc. The “assets excluded” section might be quite lengthy, including items like:

• All accounts receivable, cash, and cash equivalents held by the seller as of the Closing Date
• All bank and financial accounts
• All online platform accounts, authorizations, and codes
• Merchant accounts and use authorizations
• All insurance policies, including rights to assert claims thereunder
• Any inventory located at the seller’s office location, if any, including all bulk inventory, existing finished quantities, work in process, raw materials, constituent substances, materials, stores and supplies, trade and sample inventories
• Any office furniture, business equipment, real property, leasehold interests, personal or real property owned by seller’s principals and owners, if any, etc.
• Any of the seller’s know-how, business methods, and trade secrets, if any, owned by the seller or their principals and owners (unless specifically included on Schedule A of assets included in purchase)
• Seller’s corporate books, tax returns, and right or claim to tax refunds, if any
• Seller’s right, title, and interest in and to all Contracts, if any, being transferred to buyer

As can be seen, this hypothetical APA clearly details that the seller is NOT selling all of the assets of the e-commerce business.

A similar level of detail can be drafted for the two liability sections.

Contact the Business Attorneys at Revision Legal

For more information, contact the experienced Business Lawyers at Revision Legal. You can contact us through the form on this page or call (855) 473-8474.

Intellectual Property in Asset Purchase Transactions

Intellectual property — trademarks, copyrights, patents, trade secrets, domain names, and social media accounts — requires particularly careful treatment in an asset purchase agreement. Unlike physical assets, IP assets are intangible and the transfer of ownership requires specific legal steps beyond simply identifying the asset in the APA.

Trademark assignments must be recorded with the USPTO to be effective against third parties. Under 15 U.S.C. § 1060, an assignment that is not recorded is void against a subsequent purchaser for valuable consideration without notice. This means that if the seller assigns a trademark to the buyer in the APA but the assignment is never recorded with the Trademark Office, and the seller later purports to assign the same trademark to a second buyer who records first, the second buyer may have superior rights. Every trademark included in an asset purchase should be assigned by a separately executed Assignment of Trademark, signed by both parties, and promptly recorded with the USPTO after closing.

Copyright assignments are governed by 17 U.S.C. § 204, which requires that transfers of copyright ownership be in writing and signed by the owner. While copyright assignments are not required to be recorded with the Copyright Office, recordation creates a public record of the transfer and provides constructive notice — important protection against claims by subsequent transferees. Original product photography, website content, software, marketing materials, and other copyrightable works included in the asset purchase should be addressed by a specific copyright assignment provision.

Representations and Warranties: Protecting the Buyer

Representations and warranties are the buyer’s primary contractual protection against receiving less than was bargained for. In an APA, the seller typically makes representations and warranties about:

• Title and authority. The seller owns the assets being sold, free and clear of liens and encumbrances, and has the legal authority to transfer them. Undisclosed liens on business assets are a common problem — a UCC lien search before closing is essential.
• No litigation. There is no pending or threatened litigation involving the assets being sold. A buyer who acquires assets that are the subject of undisclosed litigation may find that the litigation follows the assets.
• Intellectual property ownership. The seller owns or has valid licenses for all IP included in the transaction. No third party has claimed that the seller’s use of any IP infringes third-party rights.
• Customer contracts. Representations about the validity, enforceability, and absence of defaults under material customer contracts are important in acquisitions where customer relationships are the primary asset.
• Compliance with law. The business being acquired has been operated in material compliance with applicable laws and regulations — including data privacy laws, employment laws, and industry-specific regulations.

Representations and warranties are only as valuable as the indemnification provisions that back them. The APA’s indemnification section — specifying which party bears losses arising from breaches of representations and warranties, the applicable survival periods, deductibles and caps on liability, and the process for making indemnification claims — is one of the most heavily negotiated parts of any business acquisition agreement.

Successor Liability: Additional Protections Beyond the APA

Even a perfectly drafted APA does not guarantee that the buyer will escape successor liability. Courts in some jurisdictions have developed doctrines that impose liability on asset purchasers regardless of what the APA says, particularly in the context of product liability claims, environmental liability, and employment-related claims. The “substantial continuity” doctrine — applied by some courts to hold that a buyer who continues a seller’s business substantially as before inherits the seller’s liabilities — is the most significant exception to the general rule against successor liability in asset purchases.

To reduce successor liability risk beyond the APA, buyers should:

• Conduct thorough pre-closing due diligence to identify and quantify known and contingent liabilities of the seller
• Consider purchasing representations and warranties insurance (R&W insurance) for transactions of sufficient size — this product shifts the risk of representation breaches to a third-party insurer rather than relying entirely on the seller’s indemnification obligation
• Structure the transaction to emphasize the discontinuity between the seller’s business and the buyer’s use of the acquired assets — different trade name, different management, different business operations — rather than operating as a seamless continuation
• Comply with any applicable bulk sales law requirements in the seller’s jurisdiction, which require notice to the seller’s creditors of the pending asset sale

Contact the Business Transaction Attorneys at Revision Legal

Asset purchase agreements are complex documents with significant legal and financial consequences for both buyers and sellers. The Business Transaction Attorneys at Revision Legal guide clients through the full asset purchase process — from letter of intent through closing — including due diligence, APA drafting and negotiation, IP assignment recording, and post-closing integration. Contact us through the form on this page or call (855) 473-8474.