Legalities of an Asset Purchase Agreement 

THE IMPORTANCE OF OBTAINING ADEQUATE SELLER REPRESENTATIONS,
WARRANTIES AND INDEMNITY AGREEMENTS

by MATT BROTHERS 
               
When purchasing the assets of a business in Tennessee, there is often no substitute for sound due diligence practices to protect the purchaser. In many instances, however, the purchaser must rely upon the seller and seller’s truthfulness. While no business purchase is risk free, obtaining certain representations, warranties, covenants and indemnity obligations from the seller is essential to help protect the purchaser:
 
·         In any asset purchase agreement, the purchaser should always insist that the seller represent, warrant and covenant certain essential matters, which may include but not be limited to the following: (i) seller owns the business and its assets and has full authority to sell the same; (ii) the assets being sold are free and clear of all security interests and encumbrances; (iii) the assets being sold are in good working condition; (iv) the financial records of the business provided by seller to purchaser are true, accurate and correct; (v) the sale of the assets will not contravene any rule, law or contract and will not create an event of default under any document or obligation; (vi) the seller and the business are not subject to any claims, proceedings or lawsuits; and (vii) seller and the business are not in default under any contract with customers, suppliers or clients. Other representations and warranties are often helpful or even necessary.
 
·         An asset purchase agreement should always include certain indemnity provisions. Simply stated, the seller should agree to pay or reimburse the purchaser for any damages, judgments or expenses (including reasonable attorney’s fees) incurred by the purchaser that result from any of the seller’s obligations with respect to the business that arise prior to closing, or that result from any breach of seller’s representations, warranties and covenants. 
 
·         It is often advisable to obtain the personal guarantee of one or more of the seller’s individual shareholders or members with respect to representations, warranties, covenants and indemnity obligations. This is especially true in a smaller business owned by a corporate entity that has only a few shareholders or members. In these instances, a purchaser should insist that one or more shareholders individually make all representations, warranties, covenants and indemnity pledges that are being made by the selling entity. 
 
·         Because each business purchase is different, purchaser and its counsel should always consider insisting upon additional seller warranties and covenants. For example, purchaser or its counsel may request a representation or warranty concerning seller or certain seller shareholders or members’ obligations to provide post-closing training and transition assistance or non-compete obligations.
 
A well drafted asset purchase agreement is essential to the purchase of the assets of a business. Asset purchase agreements will never be exactly the same, and each should properly document those warranties, covenants and indemnity obligations that are important to the purchaser in each individual transaction.