Asset Purchase Agreement Checklist for Small Business Buyers

What should an asset purchase agreement checklist cover first?

Start with the two schedules that define the deal: purchased assets and assumed liabilities. Everything else in the agreement depends on them. A buyer who signs with a schedule that says "all assets used in the business" or "to be agreed before closing" has agreed to a price without knowing what it buys.

The purchased assets schedule should name equipment by description and serial number where possible, list vehicles by VIN, and include inventory, the trade name, domain names, websites, social media accounts, phone numbers, customer lists, software licenses, supplier contracts and goodwill. Excluded assets, typically cash, bank accounts, tax refunds and personal items, should be listed too, so nothing is assumed by silence.

The assumed liabilities schedule should be short. Most buyers assume only obligations under the contracts they take over that arise after closing. Every other debt, tax, lawsuit and wage claim should be an excluded liability that stays with the seller. If you are using the free asset purchase agreement template as a comparison, notice how it separates the two lists rather than mixing them into one paragraph.

How is the purchase price paid and adjusted?

The headline price is rarely what changes hands at closing. Split it into its parts and check that each one is defined.

• Cash at closing: the amount, and where it comes from (your equity, an SBA or bank loan).
• Deposit: how much, who holds it, and when it is refundable if the deal fails.
• Escrow or holdback: how much of the price is held back after closing to pay claims, for how long, and how it is released.
• Seller note: the amount, interest rate, term, security and whether payments can be offset against claims.
• Earnout: the metric, the measurement period, who calculates it and how disputes are resolved.
• Inventory or working capital adjustment: a count at closing, how it is valued (usually at cost) and what happens if it comes in above or below the target.
• Prorations: rent, utilities, prepaid contracts and deposits split as of the closing date.

How should the price be allocated across the assets?

In an asset purchase, buyer and seller must allocate the price across seven IRS asset classes and generally both file Form 8594 with their tax returns for the year of the sale. Under 26 U.S.C. section 1060(a), if the parties agree the allocation in writing, the agreement binds both of them unless the IRS determines it is not appropriate. That makes the allocation schedule a money term, not paperwork.

Buyers generally prefer more of the price on inventory and equipment, which can be deducted or depreciated quickly, and less on goodwill, which is amortized over 15 years. Sellers often want the opposite. Insist that the allocation is attached to the agreement or fixed by a clear method before signing, and that both sides agree to file consistently. Leaving it "to be agreed after closing" invites a dispute once the seller's accountant sees the tax bill.

Which closing conditions protect the buyer?

Closing conditions are the things that must be true before you are obliged to pay. If one fails, you can walk away without breaching the agreement. The common ones for a small business purchase are listed below, with what to look for and the red flag to avoid.

Which seller representations and indemnities matter most?

Representations are the seller's factual promises about the business. They matter because they are what you sue on if something turns out to be false. For a small business, the reps that do the most work are: the financial statements are accurate, the seller owns the assets free of liens, the equipment works, there is no pending or threatened litigation, all taxes have been paid, employees have been paid correctly, the business complies with its permits, and the seller has disclosed every material contract.

Then check what those promises are worth. Look for an indemnity cap (the most you can recover), a basket (losses you absorb before you can claim), and a survival period (how long after closing you can bring a claim). A cap of 10% of the price with a 12-month survival period may be fine for a stable business and far too thin for one with tax or wage risk. Indemnification is only as good as the seller's ability to pay, which is why an escrow or a right to set off claims against a seller note is often more valuable than the indemnity clause itself.

What about employees, the non-compete and the transition?

In an asset deal, employees do not transfer automatically. The seller usually terminates them at closing and pays final wages and any accrued vacation that state law requires, and you offer jobs to the people you want. The agreement should say who pays what, and the seller should represent that wages, overtime and payroll taxes are current. Federal courts have held asset buyers responsible for a seller's unpaid overtime in some cases, so this is a real diligence item.

Check the seller's non-compete: the activities it covers, the geography and the duration. Non-competes tied to the sale of a business are treated more favorably than employee non-competes in most states, but they must still be reasonable. Also check the transition clause. How many hours will the seller work with you, for how many weeks, and is the seller paid for that time? Introductions to key customers and suppliers are often worth more than any single asset on the list.

Buying a business checklist: what to verify outside the agreement

A good agreement cannot fix a bad business. Before you sign, the agreement should be backed by diligence that confirms the numbers and the risks it describes. A practical buying a business checklist for diligence includes:

• Three years of tax returns compared with the profit and loss statements the seller gave you.
• Bank statements matched against reported revenue.
• Customer concentration: how much revenue comes from the top five customers, and whether their contracts can be assigned.
• A UCC lien search with the secretary of state where the seller is organized.
• The lease: remaining term, renewal options, rent increases and the landlord's consent requirements.
• Permits, licenses and any inspection history.
• Pending or threatened lawsuits, and any wage complaints.
• State tax clearance or bulk sale requirements, which in some states let the taxing authority collect a seller's unpaid taxes from a buyer who skips them.
• Trademark registrations, which under 15 U.S.C. section 1060(a) are assigned with the goodwill of the business and should be recorded with the USPTO.

Which red flags should stop a buyer from signing?

Some problems in a draft are negotiable details. Others are signs that the agreement, or the deal, is not ready. Pause before signing if you see any of these:

• Schedules marked "to be provided" or "to be agreed," especially the purchased assets, assumed liabilities or price allocation.
• An assumed liabilities clause that includes "all liabilities of the business" or "liabilities arising in the ordinary course" without a date limit.
• Seller representations qualified by "to the seller's knowledge" across the board, so the seller is only liable for problems it admits it knew about.
• No escrow, no holdback and no setoff right, leaving you to sue the seller personally for any claim.
• A survival period shorter than one full tax filing cycle, so tax problems surface after your claim window closes.
• Closing allowed before landlord consent, with the lease "to be assigned after closing."
• A seller non-compete that is short, local and limited to the exact business name, so the seller can reopen nearby under a new one.
• An entire agreement clause that wipes out promises made in the letter of intent or in emails that are not repeated in the agreement.

What should happen at closing, and what comes after?

The agreement should list the closing deliverables on both sides. From the seller: a bill of sale for the tangible assets, assignments of contracts and intellectual property, vehicle titles, lien releases, landlord consent, the signed non-compete and any transition or consulting agreement. From you: the payment, the signed seller note and security documents if there is seller financing, and the assumption agreement for liabilities you agreed to take.

After closing, calendar the dates that matter: the end of the survival period for claims, the release dates for escrow, earnout measurement dates and seller note payments. Many buyers lose indemnity rights simply because they notice a problem after the claim window has closed.

The Business Purchase analyzer runs an automated review of the draft from the buyer's side, splitting the price into cash, escrow, note and earnout and turning the cap, basket and survival period into dollars and dates. Use it to sharpen your questions, then have a deal attorney and an accountant sign off before you commit.