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What you need to know about asset purchase agreements

On Behalf of | Oct 20, 2020 | Franchise Law |

Those who buy a franchise will read through and sign several important documents and agreements before the sale or purchase. One of the most important is an asset purchase agreement (APA). The APA should be done at the same time as due diligence regarding finances, strategies and tax obligations, so relatively early in the transaction’s process.

While these contracts are typically non-binding, or at least unenforceable before a judge, they include a list of tangible and intangible items that are crucial to the business’s success. Examples include business contracts, real property, and equipment, as well as goodwill and know-how.

Itemizing what you buy

A prospective franchisee or investment banker usually drafts an APA before bringing attorneys who address legal details and potential exposure. It essentially creates a ledger of what the transaction involves, thus avoiding potential liabilities that the seller may have “forgotten about” or didn’t seem applicable. There may also be a schedule for the deal and a price. It is only valid if both sides read it and sign it.

Room for negotiation

Depending upon franchisee (buyer) and franchisor (seller), the buyer usually creates the APA, but a motivated seller may have one in hand. The two sides may then negotiate the details. Creating a detailed and equitable first draft will streamline the process and set the right tone for the deal. It can also mean less legal fees since the attorneys do not have to negotiate every contract point.

Closing the deal

The initial dealmakers may need to reenter the negotiations to finalize the deal if the attorneys reach an impasse on terms or price. If this happens, the attorney is only trying to do their job and protect the client’s best interests before they sign the contract.