An asset purchase agreement is a contract in which a buyer acquires specific assets of a business rather than buying the company itself. The buyer picks the pieces of the operation it wants, and the seller keeps everything else, including most historical liabilities. That selectivity is the whole point, and it is what separates an asset deal from a stock purchase, where the buyer inherits the entire entity with every debt and pending lawsuit still attached. The tradeoff is complexity: the agreement has to nail down exactly what transfers, what stays, how the price is divided for tax purposes, and what happens if something goes wrong after closing.
What Transfers and What Stays
The heart of the agreement is a pair of matching lists. The purchased assets clause identifies everything changing hands. The excluded assets clause identifies everything the seller keeps. Detailed schedules attached to the agreement serve as the definitive inventory. If an asset is not on the schedule, it does not transfer.
Purchased assets typically include physical property (equipment, vehicles, furniture, inventory) and intangible property that often carries more value than the hard assets: customer lists, proprietary software, trade names, domain names, and business records. Goodwill, which represents the established reputation and customer relationships of the business, is almost always included. Active contracts, permits, and commercial leases round out the list, though transferring those often requires consent from the other party to the contract.
Intellectual property gets special handling. Patents, trademarks, and copyrights each have their own federal registration systems, and transferring them requires recording the assignment with the relevant office. The U.S. Patent and Trademark Office maintains specific requirements for documenting a change in ownership, including a cover sheet and a recording fee.1United States Patent and Trademark Office. Transferring Ownership / Assignments FAQs An assignment that is not properly recorded can leave the buyer without enforceable rights against third parties.
On the other side of the ledger, cash on hand, corporate minute books, tax records, and equipment the buyer does not need are typical excluded assets. Retained liabilities work the same way for debts: existing bank loans, accounts payable, and pre-closing tax liabilities stay with the seller. Pending lawsuits and workers’ compensation claims arising from pre-closing events also stay behind. A well-drafted agreement makes the seller responsible for indemnifying the buyer against these pre-closing obligations, including liabilities that were unknown at the time of the sale.2U.S. Securities and Exchange Commission. Asset Purchase Agreement – CafePress.com, Inc. and Canvas on Demand, LLC – Section: Indemnification The ability to leave burdensome debts and legal risk behind is the primary reason buyers prefer an asset deal.
When a Buyer Can Still Inherit the Seller’s Liabilities
Contractual exclusions do not always hold up. Courts in most states recognize several exceptions that can saddle an asset buyer with the seller’s liabilities regardless of what the agreement says.
- De facto merger. If the transaction looks like a merger in substance, with overlapping ownership, continued operations under the same brand, and the same management team, a court may treat it as one and the buyer inherits the seller’s debts.
- Mere continuation. When the buyer is essentially the same entity as the seller with the same shareholders, directors, and officers, courts may disregard the separate corporate identity.
- Fraudulent transfer. Federal bankruptcy law allows a court to unwind a transaction if it was made to hinder or defraud creditors, or if the seller received less than reasonably equivalent value while insolvent. Deals need to be conducted at arm’s length and for fair value.3Office of the Law Revision Counsel. 11 USC 548 – Fraudulent Transfers and Obligations
- Express or implied assumption. If the buyer’s post-closing conduct suggests it took on certain obligations, even informally, a court can find implied assumption of those liabilities.
The risk of a de facto merger finding rises when the buyer retains the seller’s workforce, keeps the same physical location, and continues operating under the same name. Buyers who want clean liability protection should be deliberate about distinguishing the post-closing business from the seller’s prior operations.
Representations, Warranties, and Indemnification
Representations and warranties are the factual promises each side makes about itself and the assets being sold. The seller’s representations carry most of the weight and generally cover good title (the seller owns the assets free of liens), the absence of pending or threatened litigation, valid rights to all intellectual property being transferred, compliance with applicable law and existing contracts, and the corporate authority to complete the deal.
These are not formalities. If a representation turns out to be false, the buyer can bring an indemnification claim to recover losses. Most agreements include a survival period, typically 12 to 24 months, during which the buyer can bring claims for breached representations. Negotiating the scope, qualifiers, and survival periods of these provisions is one of the more consequential parts of the drafting process.
How the Purchase Price Is Structured
A straight cash-at-closing deal is the simplest structure, but most transactions involve multiple pieces.
Escrow Holdbacks
A portion of the price, commonly between 5 and 15 percent, is deposited into a third-party escrow account at closing and held for 12 to 24 months. That fund is readily available if the buyer discovers breached representations or undisclosed liabilities. Whatever remains at the end of the holdback period is released to the seller. Buyers push for larger holdbacks and longer periods; sellers push for the opposite.
Earnouts
An earnout ties part of the purchase price to the business hitting specific financial targets after closing. The seller receives additional payments if revenue, EBITDA, or another agreed metric reaches milestones during a defined measurement period. Earnouts bridge valuation gaps but create friction, because the buyer now controls the operations that determine whether the earnout gets paid. A well-drafted earnout specifies the accounting principles to be used, the buyer’s obligation to operate the business in good faith, and a dispute resolution mechanism, usually an independent accounting firm, for disagreements over the numbers.
Working Capital Adjustments
Most agreements include a working capital adjustment so the buyer receives a business with enough short-term liquidity to operate from day one. The parties agree on a target working capital figure, often based on a 12-month trailing average of current assets minus current liabilities. At closing, the seller delivers an estimated balance. Within 60 to 90 days after closing, the actual number is calculated from settled books and the price adjusts dollar for dollar. If actual working capital exceeds the target, the buyer pays the seller the difference; if it falls short, the seller pays the buyer. The true-up keeps the seller from running down inventory or aggressively collecting receivables right before closing.
How the Price Is Allocated for Taxes
How the purchase price is allocated among the acquired assets has real tax consequences, and buyer and seller interests directly conflict. Federal law requires both sides to use the residual method: the price is allocated to identifiable assets first, with any remaining value assigned to goodwill.4Office of the Law Revision Counsel. 26 USC 1060 – Special Allocation Rules for Certain Asset Acquisitions Both parties must report the allocation on Form 8594, attached to their income tax returns for the year of the sale.5Internal Revenue Service. Instructions for Form 8594 – Asset Acquisition Statement Under Section 1060
The IRS defines seven classes, and the price fills each class in order before any remainder flows to the next:6Internal Revenue Service. Instructions for Form 8594 – Asset Acquisition Statement Under Section 1060
- Class I: Cash and bank deposits.
- Class II: Actively traded securities and certificates of deposit.
- Class III: Debt instruments and accounts receivable.
- Class IV: Inventory.
- Class V: Other tangible assets such as furniture, equipment, vehicles, buildings, and land.
- Class VI: Intangible assets other than goodwill, including trademarks, covenants not to compete, customer-based intangibles, and government-granted licenses.
- Class VII: Goodwill and going concern value.
Sellers generally prefer a heavier allocation to goodwill, because gain on goodwill qualifies for capital gains treatment at a maximum federal rate of 20 percent, and allocating more to equipment or inventory can trigger depreciation recapture taxed at ordinary income rates up to 37 percent. Buyers want the opposite: a larger allocation to tangible assets like equipment, which can be depreciated over five to seven years, rather than goodwill, which must be amortized over 15 years. This negotiation is one of the most consequential parts of the deal for both sides’ after-tax proceeds.
Due Diligence and Consents
Before signing, the buyer investigates every aspect of what it is acquiring: financial statements, tax filings for the prior three years, pending or threatened litigation, environmental conditions, regulatory compliance, and the status of every material contract. Three items in this workstream deserve particular attention.
A search of Uniform Commercial Code filings through the Secretary of State’s office reveals whether any of the assets serve as collateral for existing loans. If a lender holds a security interest in equipment or inventory the buyer is acquiring, that lien must be released before or at closing. Skipping this step can result in the buyer paying full price for assets a creditor can repossess.
Disclosure schedules are detailed attachments that both provide affirmative information about the business (lists of intellectual property, material contracts, real property) and disclose exceptions to the seller’s representations (pending lawsuits, known environmental issues). Anything the seller discloses generally cannot form the basis of an indemnification claim later, which is why buyers scrutinize these documents and sellers are advised to disclose broadly.
Many commercial leases and vendor contracts contain anti-assignment clauses that prevent transfer without written consent from the other party. Attempting an assignment without that consent is a breach of contract, and the non-assigning party can terminate the agreement, recover damages, or both. If a critical lease or supply contract requires consent that has not been obtained by closing, the buyer may lose the ability to operate from the seller’s location or maintain key supplier relationships. Identifying which contracts require consent, and starting those conversations early, is one of the more important pre-closing tasks.
Employees and Benefits
In an asset purchase, employees do not automatically transfer. The seller’s employment relationships terminate, and the buyer selectively rehires the people it wants. Every rehired employee is legally a new hire, which means fresh I-9 verification, new employment agreements, and enrollment in the buyer’s benefit plans from scratch. Accrued vacation, pension obligations, and unpaid wages for pre-closing work are typically retained by the seller, but gaps in this section of the agreement produce some of the most expensive post-closing surprises.
Health insurance continuation adds a layer. If the seller maintains a group health plan after the sale, the seller’s plan generally remains responsible for providing COBRA coverage to employees the buyer does not hire. If the seller stops offering any group health plan in connection with the sale and the buyer continues the same business operations without interruption, the buyer becomes a successor employer and its plan picks up the COBRA obligation.7eCFR. 26 CFR 54.4980B-9 – Business Reorganizations and Employer Withdrawals From Multiemployer Plans The parties can contractually allocate COBRA responsibility between themselves, but the party with the statutory obligation stays on the hook if the other party fails to perform.
Regulatory Filings for Larger Deals
Most asset purchases do not trigger federal premerger filings, but larger transactions do. Under the Hart-Scott-Rodino Act, both parties must file a premerger notification with the Federal Trade Commission and the Department of Justice when the transaction meets the applicable size thresholds. For 2026, a filing is required when the transaction value is at least $133.9 million and the parties meet certain size requirements, or regardless of party size when the transaction value reaches $535.5 million.8Federal Trade Commission. Current Thresholds A mandatory waiting period, typically 30 days, must expire before closing. Failing to file when required can produce penalties of over $50,000 per day.
When a foreign buyer is involved, the Committee on Foreign Investment in the United States may also have jurisdiction. CFIUS review is mandatory for transactions involving critical technologies, critical infrastructure, or businesses with access to sensitive personal data of U.S. citizens, and penalties for failing to file a mandatory notice can reach the full value of the transaction.
Non-Compete Covenants
Most agreements include a covenant not to compete that prevents the seller from starting or joining a competing business for a defined period after the sale, usually two to five years within a specified geographic area. Without this protection, a seller could pocket the price and open a competing shop down the street, draining the goodwill the buyer just paid for.
Non-competes tied to the sale of a business are treated differently from employment non-competes and are generally enforceable across jurisdictions when reasonable in scope, duration, and geography. The FTC’s 2024 rule broadly restricting non-compete agreements included an explicit exemption for non-competes entered into as part of a bona fide sale of a business entity or substantially all of its operating assets.9Federal Trade Commission. FTC Announces Rule Banning Noncompetes That rule was later set aside by a federal court and is not currently in effect, but the sale-of-business exemption reflects how courts have historically treated these agreements regardless of the rule’s status.
Closing and Post-Closing Filings
At closing, both parties execute the signature pages, the seller delivers the Bill of Sale and the Assignment and Assumption Agreement transferring contracts, permits, and licenses,10U.S. Securities and Exchange Commission. Consent to Assignment and Assumption and the buyer wires the price. Large transactions typically move funds through the Fedwire Funds Service, the Federal Reserve’s real-time gross settlement system, which makes each transfer immediate, final, and irrevocable once processed.11Board of Governors of the Federal Reserve System. Fedwire Funds Services The ancillary transfer documents must carry precise identifying information (equipment serial numbers, exact contract dates) that matches the schedules to the agreement, because inconsistencies fuel post-closing disputes.
After closing, both sides file Form 8594 with the IRS to report the agreed allocation across the seven asset classes.5Internal Revenue Service. Instructions for Form 8594 – Asset Acquisition Statement Under Section 1060 Vehicle and real estate titles are updated with the appropriate local agencies. Intellectual property assignments are recorded with the USPTO or the U.S. Copyright Office. These administrative steps are easy to overlook once the deal is signed, but skipping them can leave the buyer without enforceable ownership rights in the assets it just paid for.