🏴☠️ ⚡️ Simplifying the Most Common Legal Agreement for Buying / Selling a Micro SaaS Firm (Acquisition Concept)
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TABLE OF CONTENTS:
What is an Asset Purchase Agreement (APA) and Why are they Common in Micro SaaS Firm Acquisitions?
The Simplest Definition of an APA
The Core Components of an APA
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Alright, ladies and gentlemen. Assuming very few of us are legally trained and have a JD, I thought it would be useful to simplify the most common agreement used to actually execute a Micro SaaS acquisition, the almighty Asset Purchase Agreement (APA).
To familiarize ourselves with an APA, it’s important to first distinguish it from the alternative, a Stock Purchase Agreement. This context is also useful in understanding why they are super common in our game…
What is an Asset Purchase and Why are they Common in Micro SaaS Firm Acquisitions?
In sum, APAs allow buyers to select only the valuable parts of a business, avoid unwanted liabilities, and potentially gain tax advantages, which makes them a safer and more efficient option for the buyer. Here’s a beefier version:
Asset Purchase vs. Stock Purchase
Asset Purchase:
What is Bought: Specific items like software, customer lists, and brand names.
Liabilities: The buyer doesn’t take on the seller’s debts or legal problems unless they choose to.
Control: The buyer gets control over the purchased items but not the whole company.
Stock Purchase:
What is Bought: The entirety of the company’s shares of stock.
Liabilities: The buyer takes on all the company’s debts and legal problems.
Control: The buyer gets control over the entire company.
Why Asset Purchases are Common in Micro SaaS Acquisitions
Selective Buying: Buyers can pick and choose what they want to buy and leave out the bad stuff.
Less Risk: Buyers avoid taking on the seller’s debts and legal issues.
Tax Benefits: Buyers can save money on taxes by buying specific assets and writing off their costs over time.
The Simplest Definition of an Asset Purchase
‘Asset Purchase Agreement’ is a bit misleading. You are, of course, buying the assets when you execute an acquisition, though you also are buying certain promises and committing to agreements. Here’s a simplified definition of the less obvious elements:
Representations and Warranties (Promises): These are assurances from the seller about the condition of the business and its assets. For example, the seller might promise that the business’s financial statements are accurate or that there are no legal issues pending against the business.
Covenants (Agreements): These are the actions both parties agree to take, both before and after the sale. For instance, the seller might agree to help transition the business to the new owner, or not to compete with the business for a certain period after the sale.
Now that we have a foundational knowledge of an APA, let’s move on to a more thorough (though still VERY simplified) breakdown:
The Core Components of an Asset Purchase Agreement (APA)
Preamble and Recitals (Introduction)
Preamble: Introduces the agreement and states the date and the names of the buyer and seller.
Background: Explains why the sale is happening and gives some context.
Definitions
Definitions: Lists and explains important terms used in the agreement so everyone understands them the same way.
Purchase and Sale of Assets (What’s Being Sold)
Purchased Assets: Lists the things being sold, like the codebase, vendor and user contracts, social media handles, etc.
Excluded Assets: Lists the things not included in the sale.
Assumed Liabilities: Lists the debts or responsibilities the buyer is taking on, such as ongoing contracts, accounts payable, and certain employee obligations.
Excluded Liabilities: Lists the debts or responsibilities the seller is keeping, like taxes or current debt.
Purchase Price and Payment
Purchase Price: States the total price for the assets.
Payment Terms: Explains how and when the payment will be made. This is usually a mix of cash and debt. The most common debt instrument is a seller note (or Promissory Note), which is a loan from the seller to the buyer to reduce the cash needed at the time of close (think: $1M cash and $200k in a Seller’s Note, where the buyer only needs to show up with $1M and can pay the remaining $200k over a determined period of time and interest rate). SBA loans are also very common in our market segment because the debt is so affordable (think: long time to pay off and little interest). Lastly, Earnouts (additional payments to the seller based on the future success of the business) are also super common.
Escrow: A third party holds part of the purchase price to prevent trouble, such as the seller granting access to the code base and the buyer running off without paying.
Representations and Warranties (Promises and Guarantees)
Seller’s Promises: Assurances from the seller about the business, such as its financial health and legal compliance.
Buyer’s Promises: Assurances from the buyer about their ability to complete the purchase.
Survival Period: How long the seller’s promises are valid after the sale, allowing the buyer to make claims if promises are broken.
Covenants (Agreements)
Before Closing: What both parties need to do before the sale is final, like getting approvals, securing financing, etc.
After Closing: What both parties agree to do after the sale, like non-compete agreements.
Indemnification (Handling Problems)
Indemnification: Explains how the parties will handle any losses or problems that come up after the sale, such as breaches of representations and warranties (promises).
Caps and Baskets: Caps limit the total amount the seller has to pay for any problems after the sale (usually the purchase price), while baskets set a minimum amount for claims before the seller has to pay (usually a small percentage of the purchase price). These help manage the financial risk for the seller and buyer.
Closing
Closing Date: The date when the sale is completed.
Closing Documents: Lists the documents that need to be exchanged, like bills of sale and payment receipts.
Conditions to Closing
Conditions Precedent: Lists the conditions that must be satisfied for the transaction to close, such as regulatory approvals, the absence of material adverse changes, and the truth of representations and warranties.
Termination (Ending the Agreement)
Termination Rights: Describes the circumstances under which the agreement can be terminated before closing and the consequences of such termination.
Miscellaneous Provisions (Other Stuff)
Governing Law: States which state’s laws will apply to the agreement.
Dispute Resolution: Explains how disputes will be handled, like through arbitration or court.
Notices: Provides addresses for sending formal notices.
Entire Agreement: States that this document is the complete agreement between the parties.
Exhibits (Additional documents that provide important details and support the main agreement)
Bill of Sale: Official document that transfers ownership of the assets to the buyer.
Assignment and Assumption Agreement: Lists which contracts and responsibilities the buyer is taking over.
Disclosure Schedules: Detailed lists of all the assets, liabilities, and important information about the business.
Intellectual Property Assignment: Transfers ownership of things like patents and trademarks.
Transition Services Agreement: Details any help the seller will give the buyer after the sale to ensure a smooth transition.
Non-Compete Agreement: The seller agrees not to start a similar business for a certain time and area.
Promissory Note: Terms of any loan from the buyer to the seller if the purchase is financed.
Consents and Approvals: Proof that necessary permissions from other parties or regulators are obtained.
Employment Agreements: Terms for any key employees who will continue to work for the buyer.
Woof, lots of action above. Obviously, you want a VERY solid lawyer in your corner, though hopefully the above makes you more fluent during those conversations as you ultimately guide discussions and address the business issues.
That’s a wrap this week! Go get ‘em. For the love of the game. 🏴☠️⚡️
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