Asset Purchase Agreement Key Terms Every SBA Buyer Should Know

What The Purchase Agreement Does

Your letter of intent sets the price and the outline of the deal, and most of it is non-binding. The purchase agreement is where the details become enforceable. In an asset purchase it is called an asset purchase agreement, or APA. In a stock purchase it is a stock purchase agreement, or a membership interest purchase agreement for an LLC. SBA allows both. The asset vs stock purchase guide explains how to choose.

The agreement matters to your lender as much as to you. SBA requires the lender's loan file to include all purchase agreements, with every schedule and amendment. The lender checks that the agreement matches the deal it approved: the price, the assets, the seller note terms and the seller's role after closing. If the agreement and the loan approval do not match, closing waits until they do.

What You Are Buying And What You Are Not

The first job of the agreement is to list exactly what changes hands. In an asset purchase, that usually includes equipment, vehicles, inventory, customer lists, websites and domain names, trade names, contracts you agree to take over, and the goodwill of the business. Each category normally sits on a schedule attached to the agreement.

Just as important is what you are not buying. Most small business asset deals are "cash-free, debt-free": the seller keeps the cash in the bank and pays off its own loans at closing, often from the sale proceeds. Excluded liabilities usually include the seller's taxes, lawsuits and debts. If you agree to assume any liability, such as a vehicle lease or customer deposits, the agreement should name it and the amount.

The agreement also allocates the price across asset classes. That allocation has real tax consequences for you and for the seller, so do not let it be an afterthought. See tax basics when buying a business.

Working Capital And The True-Up

Many agreements set a working capital target, often called the peg. It is the level of receivables and inventory, less current payables, the business needs to run normally. If the seller delivers less than the peg at closing, the price is adjusted after closing through a true-up.

SBA treats a working capital true-up differently from a rebate. A true-up fixes a shortfall that existed at closing, so the cash can stay in the business. A buyer rebate, where the seller refunds part of the price if the business underperforms, is also allowed, but rebate money must be used to pay down the SBA loan. What is not allowed is the reverse: a seller earnout, where the seller gets paid more later if the business does well. Our earnouts guide covers the alternatives.

Reps, Warranties And Indemnity

Representations and warranties are the seller's written promises about the business: the financial statements are accurate, the taxes are paid, the equipment works, there are no undisclosed lawsuits, the business holds its required licenses, and so on. They are your protection against things diligence could not find.

Indemnity is what gives those promises teeth. If a rep turns out to be false and it costs you money, the seller has to make you whole. The negotiation usually centers on four points:

• Survival: how long after closing you can make a claim, often 12 to 24 months for general reps and longer for taxes
• Basket: a minimum loss before claims can be made, so small items do not trigger disputes
• Cap: the most the seller can owe, often a share of the price
• Security: where the money comes from, such as an escrow holdback from the seller's proceeds or the right to offset against a seller note

A seller note can be useful here. An offset right lets you reduce what you owe the seller if a valid claim arises. If the note is on full standby for SBA purposes, the standby agreement with the lender also limits what the seller can do, so have your attorney make the note, the standby agreement and the indemnity terms fit together.

The Non-Compete And The Consulting Agreement

You are paying for goodwill, so you need the seller not to open across the street. The non-compete sets the geography, the length and the activities the seller cannot pursue. SBA lets the loan finance intangibles, including agreements not to compete, as long as the valuation and due diligence rules are met. Whether a given non-compete is enforceable depends on state law, which is one more reason to use an attorney.

On a first-time purchase, the seller cannot stay as an owner, officer, director or employee. The business can hire the seller as a consultant for up to 24 months in total, including any extensions. That consulting agreement is usually a separate document signed at closing. It should set the scope, the hours, the pay and the end date. Our guide to the seller transition and consulting agreement covers how to structure it.

Closing Conditions And The Financing Contingency

Closing conditions are the things that must be true before either side has to close. For an SBA buyer, the most important one is the financing contingency: your obligation to close depends on the SBA loan being approved and funded on the terms you expect. Without it, a lender decline could put your deposit at risk.

Other common conditions include:

• Landlord consent to assign the lease, or a new lease
• Franchisor approval, for a franchise resale
• Transfer or reissue of licenses and permits
• Key employees or customers staying on, where that is critical
• A signed seller note and standby agreement, and the consulting agreement
• No material adverse change in the business before closing

The lender has its own version of that last one. At closing, you certify that there has been no adverse change in the business's financial condition since you applied. If something big happens between approval and closing, tell your lender right away.

Seller Notes Inside The Agreement

If the seller is carrying part of the price, the agreement should reference a promissory note with its amount, its interest terms and its payment schedule. If the note is meant to count toward your Down Payment, it must be on full standby, with no payments of principal or interest for the life of the SBA loan, and the seller signs SBA Form 155 or the lender's equivalent standby agreement. Get the standby terms right in the purchase agreement so nobody is surprised when the lender's documents arrive. The standby note guide has the rules.

How To Work With Your Attorney On It

Typically the buyer's attorney drafts the agreement and the seller's attorney marks it up, though in broker-led deals the broker may supply a template. Either way, a few habits save time and money:

1. Hire the attorney before the LOI is final. Ten minutes of review on the LOI can prevent days of arguing later.
2. Share the lender's approval terms. Your attorney should know the loan structure, the standby terms and the consulting limit before drafting.
3. Send the draft to your lender early. The lender has to review the final agreement and its schedules anyway.
4. Keep a list of open points. Reps, the cap and the non-compete radius are where most of the time goes.

If you have not lined up financing yet, start with a pre-qualification letter so the agreement can be built around a structure lenders will approve. The SBA business acquisition loan page explains the loan, and the closing day guide covers what happens when everyone signs.