A recent post discussed a few generalities on stock purchases and asset purchases. In a basic sense, the characteristics of a stock purchase and of an asset purchase will guide the parties in the earliest stages of negotiation over whether to structure the transaction as a stock or asset deal. This post and posts to follow will expand on certain aspects of both types of deals that the parties may face as negotiations progress, beginning with a few initial considerations for parties negotiating an asset purchase.

Many questions remain to be discussed and negotiated after the parties agree to structure a deal as an asset purchase. The answers to these questions will have real effects on the processes involved in the transaction, the purchase price and due diligence, among other things.

One of the first of these questions is whether the parties have defined the assets that the purchaser will buy. While it is not necessary to have a completed inventory list or to have identified all of the seller's accounts receivable at this point, the parties should have an idea of what is being bought and sold. Discussions at this point should also include an understanding of the seller's liabilities the purchaser will take at closing. The scope of assets to be purchased will certainly drive the purchase price. Perhaps more importantly, however, it should also cause the parties to think about and possibly negotiate the processes for obtaining appraisals of the assets, increasing or decreasing the purchase price based upon the results of the appraisals and perhaps negotiating the right to terminate the transaction if the assets do not appraise for a certain amount. The scope of assets to be purchased will also affect the length of the due diligence period. The seller may be motivated to get to closing as soon as possible, but the purchaser will want to negotiate sufficient time to investigate and understand the assets, the seller and likely the seller's principals.

A purchaser should ask for a list of liens on seller's assets early in the process. Purchaser should not understand seller's answer to be definitive; title work and UCC lien searches should still be conducted. Seller's answer should, however, allow purchaser to understand which assets are subject to existing liens and what entities hold those liens. With this information, the parties can begin the process of getting payoff amounts and lien releases.

Early negotiations may also include discussions on payment of the purchase price. Will the purchaser pay all cash, all stock in purchaser or a combination of the two? If the purchase price is to be paid in cash, will the purchaser need to obtain financing with a traditional lender or perhaps from the seller? The answers to these questions will necessarily drive additional questions. If the purchase price is to be paid in stock of the purchaser, the seller will consequently want to negotiate for its own due diligence period. The seller will also want to negotiate its rights as an equity owner of purchaser, such as a position on the board of directors or certain minority equity holder rights. If a portion of the purchase price is to be financed through both traditional bank debt and seller-financing, the seller may be able to negotiate security interests to collateralize the debt, although the parties may find that the bank will not allow the purchaser to grant liens in addition to those it grants to the bank.

The parties will want to understand at an early stage whether the transaction triggers any statutory or other obligations. For example, notice pursuant to under the Hart-Scott-Rodino Act of 1976 may be required, or the seller may be required to terminate a sufficient number of employees at closing to trigger obligations under The Worker Adjustment and Retraining Notification (WARN) Act.

A purchaser should also consider negotiating for seller to negotiate the potential asset purchase with purchaser exclusively. Certainly the perceived market for the assets will guide purchaser on this issue. If there are identifiable potential purchasers in the market, then purchaser would likely want seller to deal with it exclusively, and that may require purchaser to pay seller for the right to discuss the transaction without outside influence for a number of months. If, on the other hand, the seller is unlikely to find another purchaser for the assets, then an exclusivity agreement is less necessary.

There are, of course, many other matters for the parties to discuss, several of which will lead to new issues to overcome and questions to answer. Frequently, the early negotiations on the larger points will lead the parties to enter into a memorandum of understanding or a term sheet. These agreements and others like them will be discussed in the next post.