Subject: Asset Purchase Agreement – Buyer Comments on Risk Allocation
Seller,
Thank you for circulating the draft Asset Purchase Agreement. We have completed our review from the Buyer side and, as currently drafted, the agreement allocates a level of legacy and post-closing risk to Buyer that is not workable for this transaction.
The principal issues are:
1. Assumed liabilities. Section 2 currently requires Buyer to assume essentially all liabilities of the Business, including pre-closing unknown liabilities, product warranty and product liability claims, and accrued employee obligations. That is inconsistent with the basic economics of an asset acquisition. Buyer can assume only specifically identified post-closing operating liabilities, while Seller must retain all pre-closing and contingent liabilities.
2. No purchase-price adjustment. Section 4 eliminates any working-capital, net-debt, cash-free/debt-free, or post-closing true-up mechanics. We need a customary working-capital adjustment, together with debt-free/cash-free treatment and a post-closing reconciliation process.
3. No indemnity security. Section 3 provides for full release of the purchase price at closing with no escrow or holdback. Given the current liability allocation and limited indemnity package, Buyer needs a meaningful escrow to secure post-closing claims and any purchase-price adjustment.
4. Reps, survival, and closing protection. The current draft makes all Seller reps knowledge-qualified, limits survival to six months, eliminates any bring-down at closing, and allows disclosure schedule updates to cure breaches. That combination leaves Buyer with little practical protection. We need a standard rep package, a closing bring-down, longer survival, and schedule supplements that do not automatically cure breaches.
5. Indemnification limitations. The 5% cap, $50,000 basket, $5,000 de minimis threshold, anti-sandbagging language, and exclusive-remedy clause that purports to include fraud are not acceptable. We need a more balanced indemnity structure, including carve-outs for fraud, intentional misconduct, fundamental matters, retained liabilities, taxes, and pre-closing product and employment claims.
6. Consents and assigned contracts. Buyer cannot close unconditionally and then bear the burden of obtaining all customer, supplier, landlord, and other third-party consents after closing at Buyer’s sole risk and expense. Material required consents and assignments need to be closing conditions, or there must be a clear exclusion/price-adjustment/special-indemnity mechanism.
7. Employees and tax allocation. Buyer cannot assume all accrued wages, PTO, severance, WARN, and other employment liabilities attributable to pre-closing periods. In addition, Form 8594 allocation cannot be left to Seller’s sole discretion; it needs to be mutually agreed.
8. Earnout and exclusivity. If an earnout remains, the metric definitions and dispute process must be objective and neutral. Also, once the agreement is signed, Seller cannot continue soliciting and negotiating competing offers while Buyer is spending time and money to get to closing.
We are marking the draft to address the above points. If helpful, we can turn comments quickly and focus first on the gating items: assumed liabilities, purchase-price adjustment mechanics, indemnity structure, disclosure schedule treatment, required consents, and exclusivity.
We remain interested in moving forward, but the current draft needs substantial revision so that the transaction reflects a customary asset-deal allocation of risk.
Best,
Buyer
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