Asset Purchase Agreements Explained

An asset purchase agreement, usually shortened to an APA, is the contract under which a buyer acquires identified assets of a business, together with an agreed set of liabilities, rather than acquiring the company that owns them. Because an asset purchase moves each item individually rather than transferring ownership of a legal entity, the agreement only does its job if the schedule of assets is genuinely complete and if every item that needs a third party’s agreement has it before completion.

We act for both buyers and sellers on asset purchases, and the same point comes up on nearly every deal: the parties agree a price quickly and then discover that a lease, a key supply contract or a regulatory registration cannot simply be handed over. This article sets out what an APA contains, what actually transfers under it, what does not, and what has to happen on completion day. If you are still deciding how to structure the deal at all, start with our comparison of a share sale and an asset sale.

What an asset purchase agreement does

An APA is a sale contract. It records what is being sold, what is being left behind, what the price is and how it is paid, what the seller promises about the business, and what each side has to deliver at completion. Its distinguishing feature is the schedule of assets: in a share purchase the buyer acquires the company and everything inside it comes along by default, whereas in an asset purchase nothing transfers unless the agreement says it does.

A typical APA for an owner-managed business runs to the following sections: definitions and interpretation; the agreement to sell the assets; consideration and how it is apportioned between asset categories; conditions that must be satisfied before completion; completion obligations; warranties from the seller, qualified by a disclosure letter; limitations on the seller’s liability; employees and TUPE; apportionments; VAT; restrictive covenants; and provisions dealing with contracts that could not be transferred before completion. The structure is similar in principle to a share purchase agreement, but the asset schedule and the consent machinery do a great deal more work.

When an asset purchase is chosen over a share purchase

Buyers generally prefer an asset purchase because it lets them leave unwanted liabilities with the seller. Sellers generally prefer a share sale because it gives a clean exit and, for individual shareholders, usually a more favourable tax outcome. In practice the structure is often settled by something more prosaic: a sole trader or a partnership has no shares to sell, so an asset purchase is the only option, or the buyer wants one division of a larger company and not the company itself.

Rates and reliefs change, and the tax position on both sides is rarely as simple as the headline figure suggests. Confirm your own position with your accountant or tax adviser before committing to a structure.

The asset schedule: working through what is actually being bought

The asset schedule is where most of the drafting time goes, and it is where most asset purchases come unstuck. Each category behaves differently in law. Some transfer by the agreement alone, some need registration, and some cannot transfer at all without a third party agreeing. The table below is the map we work through with clients on both sides of a deal.

What does not transfer automatically, and what to do about it

The single most important thing to understand about an asset purchase is that the APA binds the buyer and the seller, and nobody else. It cannot force a landlord, a bank, a customer or a regulator to accept the buyer in the seller’s place.

Contracts are the clearest example. The benefit of a contract, meaning the right to be paid or supplied, can usually be assigned. The burden, meaning the obligation to perform, cannot be assigned at all. Moving both requires a novation: a three-way agreement under which the original contract ends and an identical one begins between the counterparty and the buyer. Many commercial contracts also prohibit assignment outright or make it conditional on consent, and those clauses are effective. We look at this in more detail on our commercial contracts page.

Because consents rarely all arrive in time, a well-drafted APA deals with the gap rather than pretending it does not exist. The usual mechanism is a clause under which the seller holds the benefit of any unassigned contract on trust for the buyer, accounts to the buyer for what it receives, and allows the buyer to perform the seller’s obligations as sub-contractor, with the buyer indemnifying the seller for anything that goes wrong in the meantime. Both sides also agree to keep using reasonable endeavours to obtain the outstanding consents after completion.

• Leases: check the alienation clause early. Landlord’s consent on a commercial lease routinely takes longer than the rest of the transaction, and our commercial lease red flags are worth reading before you rely on a target’s premises.
• Asset finance and hire purchase: identify which equipment the seller actually owns. Anything financed must be settled at completion or novated with the funder’s agreement.
• Software and IT: per-seat and per-entity licences frequently do not transfer. The buyer may need to buy its own.
• Regulatory registrations: start the application before exchange, not after. In healthcare, licensed premises and financial services this is normally the longest lead item.
• Personal data: confirm the lawful basis for transferring customer records and update privacy information after completion. Our guide to UK data protection compliance covers the controller obligations the buyer takes on.

Identifying all of this is the job of legal due diligence, and on an asset purchase the diligence exercise is not optional. A buyer who has not read every lease, licence and material contract does not know what it is buying.

Employees and TUPE

Where an asset purchase amounts to the transfer of a business, or part of a business, as a going concern, the Transfer of Undertakings (Protection of Employment) Regulations 2006 apply automatically. Regulation 3(1)(a) catches a transfer of an undertaking, business or part of a business situated in the United Kingdom where there is a transfer of an economic entity that retains its identity. Buying a trading business and continuing to run it will almost always meet that test.

The consequence is set out in regulation 4. A relevant transfer does not terminate the contracts of employment of employees assigned to the business being transferred. Those contracts take effect after the transfer as if originally made with the buyer, and all of the seller’s rights, powers, duties and liabilities under or in connection with them pass to the buyer. Acts and omissions of the seller before the transfer are treated as the buyer’s. That is a significant point for buyers: an outstanding grievance, an unpaid holiday entitlement or a live discrimination claim moves across with the employee.

Two procedural obligations bite before completion. Under regulation 11, the seller must give the buyer specified employee liability information, including each employee’s identity and age, their written statement of particulars, disciplinary and grievance records from the previous two years, and details of actual or anticipated claims. Regulation 11(6) requires this not less than 28 days before the transfer, and regulation 11(3) requires the information to be correct as at a date no more than 14 days before it is given. A buyer who does not receive it can bring a tribunal complaint under regulation 12, where compensation is not less than £500 per affected employee unless the tribunal considers a lower sum just and equitable.

Separately, regulation 13 requires both seller and buyer to inform, and where measures are envisaged consult, appropriate representatives of affected employees long enough before the transfer for consultation to be meaningful. Since 1 January 2024, regulation 13A allows an employer to deal directly with affected employees where there are no existing representatives and either the employer has fewer than 50 employees or fewer than 10 employees are transferring. That is a practical easing for smaller businesses, but it does not remove the duty itself.

The APA should allocate the risk: warranties about the workforce, indemnities running in both directions for pre-transfer and post-transfer liabilities, and a clear position on who bears the cost of any failure to inform and consult. We cover the mechanics, the timing and the common mistakes in full in our article on TUPE when buying or selling a business, and our employment team works alongside the corporate team on every deal where staff transfer.

Excluded assets and retained liabilities

The list of what is not being bought matters as much as the list of what is. On a typical owner-managed business sale the seller keeps the cash at bank, the corporation tax position, the trade debtors up to completion, the statutory books and accounting records, any property or vehicles used personally by the owner, and any litigation arising from events before completion.

On the liabilities side, a buyer on an asset purchase takes only what it agrees to take. That usually means obligations under transferring contracts arising after completion, obligations to transferring employees arising after completion, and nothing else. Everything historic, including unpaid suppliers, tax, product claims and disputes, stays with the seller. This is the structural advantage of an asset purchase for a buyer, and it is why the definition of assumed liabilities needs to be drawn tightly rather than left to a general sweep-up.

The seller’s protection against the warranties it has given comes from the disclosure letter and the limitation clauses, which work in the same way as on a share sale. Our article on warranties and indemnities explains how the two interact.

Apportionments

A business does not stop trading on completion day, so a number of outgoings and receipts straddle it. The apportionments clause divides them at midnight on the completion date, with the seller taking the benefit and burden of everything up to that point and the buyer everything afterwards.

The items that usually need apportioning are rent, service charge and insurance rent on the premises, business rates, utilities and telecoms, trade subscriptions and software licences, maintenance and service contracts, employee wages, accrued holiday pay and pension contributions, and customer deposits or prepayments for work not yet done. Customer deposits deserve particular attention: if the buyer is going to perform the work, the cash needs to come across with the obligation, otherwise the buyer is doing the job for nothing.

Apportionments are usually estimated at completion and finalised within an agreed period afterwards, with a balancing payment one way or the other and an expert determination clause if the parties cannot agree the numbers.

VAT and transfer of a going concern

Selling the assets of a VAT registered business is normally a taxable supply, so VAT would be chargeable on the sale of the goodwill, equipment, stock and anything else transferring. The transfer of a going concern rules take that charge away where the conditions are met. The relief sits in article 5 of the Value Added Tax (Special Provisions) Order 1995, which treats a qualifying transfer as neither a supply of goods nor a supply of services.

HMRC sets out the conditions in VAT Notice 700/9. All of the following must apply. The assets, such as stock in trade, machinery, goodwill, premises and fixtures and fittings, must be sold as part of the transfer. The buyer must intend to use the assets in carrying on the same kind of business as the seller, and must be in possession of a business rather than simply a set of assets. Where the seller is a taxable person, the buyer must already be registered for VAT or become registrable as a result of the transfer. Where only part of the business is sold, that part must be capable of operating separately. There must not be a series of immediately consecutive transfers of the business. And where land or buildings are included which would be standard rated if supplied, the buyer must have notified HMRC of its own option to tax by the relevant date and must have told the seller that the option will not be disapplied.

Three points are worth drawing out, because they are the ones that cause arguments on completion day.

• The rules are mandatory. HMRC is explicit that the parties cannot opt out. If the transaction is a transfer of a going concern, VAT must not be charged, and if it is charged in error the buyer cannot recover it as input tax and the seller has to credit it.
• The option to tax deadline is the completion date, not afterwards. HMRC treats the relevant date as the time of supply, which is normally the date of the transfer, and the receipt of a deposit can create an earlier tax point. A buyer who opts to tax the week after completion has missed it, and the property element falls outside the relief.
• Records stay with the seller unless the VAT number moves. The seller keeps the business records unless the parties apply on form VAT68 to transfer the VAT registration number, in which case the buyer also takes on the seller’s outstanding VAT liability. Where the records stay with the seller, the seller must still make available the information the buyer needs to meet its own VAT obligations.

In practice the APA deals with this by stating the parties’ shared intention that the sale is a transfer of a going concern, requiring the buyer to be VAT registered and, where relevant, to opt to tax and give the required notifications by completion, and providing that if HMRC later rules that VAT is due the buyer pays it against a valid VAT invoice. Treatment of any stamp duty land tax on property forming part of the sale is handled separately by the commercial property element of the transaction. The VAT and tax analysis on any particular deal should be confirmed with your accountant or tax adviser before heads of terms are signed, not after.

Completion mechanics

Asset purchases often exchange and complete simultaneously, because there is usually no reason to split them once consents are in hand. Where a key consent or a regulatory approval is outstanding, the parties exchange on conditions and complete when those conditions are satisfied, with a long stop date after which either side can walk away.

Completion itself is a document exercise. The seller delivers the signed APA, assignments of the intellectual property, the transfer or assignment of the property together with the landlord’s licence to assign, novation agreements for the contracts that have been novated, the disclosure letter, releases of any charges registered at Companies House over the assets, keys and physical possession of the premises and equipment, and the agreed form announcement to customers, suppliers and staff. The buyer delivers the purchase price, any guarantee or security the seller has required for deferred payments, and board minutes approving the acquisition.

Post-completion matters are easy to forget and should be diarised on the day: recording intellectual property assignments at the Intellectual Property Office, registering the property transfer at HM Land Registry within the priority period, notifying debtors in writing where book debts have been assigned, transferring or re-applying for licences, notifying insurers, finalising the stocktake and the apportionment account, and filing the VAT68 if the registration number is moving.

Where part of the price is held back or paid later, the drafting needs to be tied to the completion mechanics properly. The same is true of restrictive covenants, which are what stop the seller taking the goodwill straight back out of the business the week after completion. Both buyers and sellers should read our guide to buying a business and our guide to selling a business for how the APA fits into the transaction as a whole.

Where asset purchases go wrong

The problems we see most often are not exotic. An asset schedule that lists equipment the seller is still paying for under a finance agreement. A buyer that budgeted for the price but not for the landlord’s consent, the rent deposit and the authorised guarantee agreement. Employee liability information produced three days before completion rather than 28. A domain name registered in a former director’s personal account. Customer deposits left behind with the seller while the obligation to do the work moved to the buyer. And a VAT invoice raised on completion for a sale that was always going to be a transfer of a going concern.

Every one of these is avoidable with diligence done early and a schedule built from the records rather than from the seller’s recollection. Our corporate team runs the same checklist on every asset deal, whichever side we are acting for, and sector-specific transactions bring their own layer, as our guide to buying a dental practice shows.

Talk to us about your asset purchase

Asset purchases reward preparation. Getting the schedule right, starting the consents early and settling the VAT and TUPE positions before heads of terms are signed is what turns a deal that drags into one that completes on time. We act for buyers and sellers on asset purchases across London and nationally, from single-site owner-managed businesses to multi-site acquisitions in regulated sectors.

If you are preparing to buy or sell a business and want the structure looked at properly before you commit, speak to our team about buying a business or selling a business. Call us on +44 207 566 1188 or email info@gurvelegal.com and we will tell you plainly what the deal needs.