An Asset Purchase Agreement (APA) is one of the most common legal agreements used when purchasing or selling a business. Unlike a share purchase, where ownership of a corporation changes hands, an asset purchase generally allows the purchaser to acquire selected assets while leaving many historical liabilities with the seller.
Asset purchases are frequently used in acquisitions involving private companies, professional practices, regulated businesses, manufacturing operations, retail businesses, technology companies, restaurants, franchises, and family-owned enterprises.
At Substance Law, we advise buyers, sellers, investors, and businesses throughout Canada on drafting, reviewing, negotiating, and closing Asset Purchase Agreements and related transaction documents.
What Is an Asset Purchase Agreement?
An Asset Purchase Agreement is a contract governing the sale and purchase of specific business assets.
Rather than purchasing ownership of the corporation itself, the purchaser acquires assets identified in the agreement.
These assets may include:
- equipment;
- inventory;
- machinery;
- intellectual property;
- trademarks;
- domain names;
- customer lists;
- goodwill;
- contracts;
- permits;
- licences (where transferable);
- vehicles;
- furniture;
- software;
- accounts receivable (where applicable); and
- other business assets.
The agreement also identifies which assets are excluded from the transaction.
Asset Purchase vs. Share Purchase
One of the first decisions in an acquisition is whether to purchase assets or shares.
In a share purchase:
- ownership of the corporation changes;
- contracts generally remain with the corporation;
- historical liabilities often remain with the corporation;
- licences may continue without reassignment, depending on applicable law.
In an asset purchase:
- selected assets are transferred individually;
- liabilities are negotiated;
- contracts may require assignment;
- employees may need new employment offers;
- permits or licences may require regulatory approval or reissuance.
The appropriate structure depends upon the business, industry, tax considerations, liabilities, financing, and commercial objectives.
Why Buyers Choose Asset Purchases
Purchasers often prefer asset purchases because they may:
- limit assumption of historical liabilities;
- select only desired assets;
- exclude unwanted contracts;
- avoid legacy litigation;
- exclude tax liabilities;
- restructure operations;
- obtain a stepped-up tax basis for acquired assets in some circumstances; and
- reduce unknown business risks.
However, asset purchases are not always preferable and should be evaluated on a case-by-case basis.
Why Sellers May Prefer Share Sales
Although this page focuses on Asset Purchase Agreements, sellers sometimes prefer a share sale because:
- the entire business transfers;
- fewer individual assignments may be required;
- tax treatment may be more favourable;
- historical liabilities generally remain with the corporation; and
- the Lifetime Capital Gains Exemption may be available where applicable.
The transaction structure is often heavily negotiated.
Assets Included in the Purchase
The APA should clearly identify every asset being purchased.
This may include:
- inventory;
- equipment;
- machinery;
- leasehold improvements;
- intellectual property;
- trade secrets;
- customer databases;
- websites;
- software;
- social media accounts;
- telephone numbers;
- business names;
- trademarks;
- copyrights;
- patents;
- goodwill;
- contracts;
- purchase orders;
- permits (where transferable); and
- other tangible or intangible assets.
A detailed asset schedule reduces the likelihood of post-closing disputes.
Excluded Assets
The agreement should also identify excluded assets.
Examples include:
- cash;
- bank accounts;
- tax refunds;
- shareholder loans;
- certain receivables;
- excluded intellectual property;
- personal assets;
- excluded contracts;
- litigation claims; and
- specifically identified inventory.
Proper drafting helps ensure there is no uncertainty about ownership after closing.
Assumed Liabilities
One of the principal advantages of an asset purchase is that liabilities are generally negotiated.
Common assumed liabilities may include:
- warranty obligations;
- customer deposits;
- assumed contracts;
- lease obligations;
- service agreements;
- employee obligations;
- accounts payable specifically assumed by the purchaser; and
- other agreed liabilities.
Liabilities that are not expressly assumed generally remain with the seller, subject to applicable law.
Purchase Price Allocation
Asset purchases typically require allocation of the purchase price among the acquired assets.
The allocation may affect:
- income tax;
- GST/HST;
- capital cost allowance;
- depreciation;
- inventory treatment;
- goodwill;
- intellectual property;
- recapture;
- future tax deductions; and
- financial reporting.
The allocation should be carefully reviewed by both legal and tax advisors.
Due Diligence
Buyers commonly conduct legal due diligence before signing or closing the transaction.
Due diligence may include reviewing:
- corporate records;
- ownership of assets;
- contracts;
- leases;
- employment agreements;
- intellectual property;
- litigation;
- financing arrangements;
- security interests;
- tax compliance;
- regulatory licences;
- environmental issues;
- insurance; and
- privacy compliance.
Identifying issues early often improves negotiating leverage.
Representations and Warranties
Asset Purchase Agreements commonly contain detailed representations and warranties.
The seller may provide representations regarding:
- ownership of assets;
- authority to sell;
- title;
- absence of liens;
- litigation;
- taxes;
- contracts;
- employees;
- intellectual property;
- regulatory compliance;
- environmental matters;
- financial records; and
- disclosure.
The purchaser may also provide representations regarding authority, financing, and closing capacity.
Conditions of Closing
Closing conditions commonly include:
- board approval;
- shareholder approval where required;
- financing;
- regulatory approvals;
- assignment of contracts;
- landlord consent;
- third-party consents;
- employee matters;
- delivery of closing documents;
- releases; and
- satisfaction of all negotiated conditions.
Failure to satisfy closing conditions may permit termination of the transaction.
Employees
An asset purchase does not necessarily transfer employment relationships automatically.
Issues may include:
- offers of employment;
- termination obligations;
- vacation liabilities;
- pension obligations;
- employee benefits;
- executive agreements;
- restrictive covenants; and
- successor employer considerations.
Employment planning should occur well before closing.
Contracts and Assignments
Unlike a share purchase, many contracts require assignment before they can be transferred.
Examples include:
- customer agreements;
- supplier agreements;
- leases;
- franchise agreements;
- software licences;
- financing agreements;
- distribution agreements; and
- government contracts.
Failure to obtain required consents can delay or prevent closing.
Regulatory Approvals
Businesses operating in regulated industries may require regulatory approvals before assets can be transferred.
This may involve:
- Health Canada licences;
- cannabis licences;
- liquor licences;
- food licences;
- pharmacy approvals;
- payment service provider registrations;
- money services business registrations;
- transportation authorities;
- environmental permits; and
- municipal licences.
Regulatory due diligence should begin early in the transaction.
Intellectual Property Transfers
Intellectual property is frequently one of the most valuable assets being acquired.
The APA should clearly address ownership and assignment of:
- trademarks;
- copyrights;
- patents;
- domain names;
- software;
- trade secrets;
- confidential information;
- databases;
- customer lists; and
- licensing rights.
Separate assignment agreements may also be required.
Restrictive Covenants
Purchasers commonly negotiate restrictive covenants to protect the value of the acquired business.
These may include:
- non-competition clauses;
- non-solicitation clauses;
- confidentiality obligations;
- customer non-solicitation;
- employee non-solicitation; and
- protection of trade secrets.
These provisions should be carefully drafted to maximize enforceability.
Indemnification
The APA typically allocates post-closing risk through indemnification provisions.
These may address:
- breaches of representations;
- breaches of warranties;
- tax liabilities;
- environmental liabilities;
- employee claims;
- third-party claims;
- fraud;
- monetary caps;
- baskets;
- deductibles; and
- survival periods.
Indemnification is often one of the most heavily negotiated parts of the agreement.
Closing the Transaction
Closing typically involves:
- execution of transaction documents;
- payment of the purchase price;
- transfer of assets;
- assignment of contracts;
- delivery of keys and passwords;
- intellectual property assignments;
- corporate resolutions;
- financing registrations;
- releases;
- regulatory filings; and
- post-closing undertakings.
Careful closing management helps avoid disputes after completion.
Common Asset Purchase Agreement Issues
Businesses frequently seek legal advice regarding:
- unclear asset descriptions;
- missing schedules;
- contract assignment issues;
- employee transfers;
- GST/HST elections;
- purchase price allocation;
- regulatory approvals;
- environmental risks;
- hidden liabilities;
- financing issues;
- restrictive covenant drafting; and
- indemnification negotiations.
Early legal advice can often prevent costly post-closing disputes.
Our Asset Purchase Agreement Services
Substance Law assists clients with:
- drafting Asset Purchase Agreements;
- reviewing APAs;
- negotiating purchase terms;
- legal due diligence;
- transaction structuring;
- purchase price allocation coordination;
- intellectual property transfers;
- regulatory approvals;
- closing documents;
- employment matters;
- restrictive covenants;
- indemnification negotiations;
- post-closing matters; and
- regulated industry acquisitions.
Work With an Asset Purchase Agreement Lawyer in Canada
Whether you are purchasing a business, selling selected assets, acquiring intellectual property, or restructuring a commercial transaction, Substance Law can help ensure your Asset Purchase Agreement protects your legal and commercial interests.
Frequently Asked Questions About Asset Purchase Agreements in Canada
What is an Asset Purchase Agreement?
An Asset Purchase Agreement is a contract under which a purchaser acquires specified assets of a business rather than purchasing ownership of the corporation itself.
What is the difference between an asset purchase and a share purchase?
An asset purchase transfers selected business assets, while a share purchase transfers ownership of the corporation and its shares.
Why do buyers often prefer asset purchases?
Buyers may prefer asset purchases because they can often exclude unwanted liabilities and acquire only selected business assets.
Are liabilities automatically transferred in an asset purchase?
Not necessarily. The agreement typically specifies which liabilities, if any, the purchaser assumes.
Can contracts be transferred in an asset purchase?
Many contracts require the consent of the other contracting party before they can be assigned to the purchaser.
Does an Asset Purchase Agreement cover intellectual property?
Yes. APAs commonly address the transfer of trademarks, copyrights, patents, software, domain names, trade secrets, and other intellectual property.
Are regulatory approvals required for asset purchases?
Depending on the business, approvals may be required for licences, permits, or regulated activities before closing.
Should an Asset Purchase Agreement include indemnification provisions?
Yes. Indemnification provisions help allocate post-closing risk between buyers and sellers and are an important part of most commercial acquisitions.
Can Substance Law draft or review an Asset Purchase Agreement?
Yes. Substance Law assists buyers and sellers throughout Canada with drafting, reviewing, negotiating, and closing Asset Purchase Agreements and related business acquisition transactions.
