Asset Purchase Agreement (APA): What's Inside, How It Differs From a Stock Sale, and Free Template

The asset purchase agreement is where the lawyers earn their fees.

The LOI established the price. The diligence verified the business exists as represented. The APA is the document that converts everything into legally binding obligations: the seller's promises about the business, the buyer's payment obligations, the carve-outs and exceptions, and the rules for what happens if either side breaks any of it.

This post walks through what's in an APA, how the asset purchase structure compares to a stock purchase, what the most-negotiated sections actually cover, and how to read disclosure schedules. There's a free APA template at the bottom — useful as a starting structure for legal review, not as a finished document. SMB deals under $5M typically need transaction counsel even on a "simple" APA.

What is an asset purchase agreement

An asset purchase agreement (APA) is the definitive legal contract for a business sale where the buyer is acquiring specific assets from the seller — equipment, inventory, customer contracts, intellectual property, goodwill — rather than acquiring the seller's legal entity.

In SMB acquisitions, asset sales are the dominant structure for two reasons:

1. Liability isolation: the buyer takes only the liabilities explicitly assumed in the APA. Pre-closing tax issues, undisclosed lawsuits, environmental violations, or labor disputes stay with the seller's old entity.
2. Tax basis step-up: the buyer's purchase price gets allocated across the acquired assets, creating new tax basis. Depreciable assets generate depreciation deductions; goodwill and intangibles amortize over 15 years under IRC Section 197. These deductions reduce post-close taxable income.

The seller, in contrast, generally prefers a stock sale because it produces capital gains treatment (lower tax rates) on the entire purchase price. Asset sales produce a mix of ordinary income (depreciation recapture, inventory) and capital gains (goodwill), which often results in a higher effective tax rate for the seller.

Most SMB acquisitions resolve this tension by structuring as asset sales with the seller getting a small price premium to compensate for the tax differential.

The 12 sections every APA needs

APAs vary significantly by transaction complexity and by the drafting attorney's preferences, but a complete SMB APA covers these twelve sections.

1. Definitions and interpretation

Pages 1-10 of most APAs. Defines every capitalized term used elsewhere. Reading these matters because a definition like "Material Adverse Effect" is heavily negotiated and determines whether the buyer can walk if something goes wrong between signing and closing.

What to watch for: definitions that exclude general economic conditions, industry-wide events, or pandemic-related impacts from the "material adverse effect" definition — these reduce buyer protection.

2. Purchase and sale of assets

The list of assets being acquired:

• Tangible assets (equipment, inventory, vehicles, leasehold improvements)
• Intangible assets (customer lists, trade names, trademarks, copyrights, software licenses, domain names)
• Contracts being assigned (customer agreements, vendor contracts, real estate leases, equipment leases)
• Permits and licenses (where transferable)
• Goodwill
• Records and books

And explicitly excluded assets:

• Cash and cash equivalents (typically retained by seller through closing date)
• Accounts receivable up to a cutoff date (varies by deal)
• The seller's entity itself
• Personal effects, vehicles not used in business, owner's home office
• Pre-closing tax refunds
• Insurance proceeds for pre-closing events

Mistakes happen in this section. The asset list should be cross-checked against the seller's balance sheet. Items that show up on the balance sheet but aren't in the asset list are either intentionally excluded (in which case they should appear in the excluded list) or accidentally omitted (in which case they need to be added).

3. Assumed and excluded liabilities

The other half of the asset purchase advantage.

Assumed liabilities — what the buyer takes on:

• Trade payables incurred in ordinary course
• Customer deposits and prepayments
• Equipment lease obligations going forward
• Real estate lease obligations going forward
• Specifically named contracts
• Warranty obligations on assumed inventory
• Working capital obligations

Excluded liabilities — what stays with the seller:

• All liabilities not specifically assumed
• Pre-closing tax obligations of any kind
• Pre-closing employment liabilities
• Pre-closing litigation, even if undisclosed
• Pre-closing environmental issues
• Indebtedness for borrowed money

The principle: the buyer assumes liabilities only if specifically listed; everything else stays with the seller.

4. Purchase price and allocation

The total consideration plus the breakdown:

• Cash at close
• Seller note (with terms: interest rate, amortization, security)
• Earn-out (with calculation methodology and dispute resolution)
• Working capital adjustment (with target, true-up window, dispute resolution)
• Escrow holdback (with release schedule and triggers)

And the purchase price allocation under IRC Section 1060 — both parties must agree on how to allocate the purchase price across asset classes for Form 8594 purposes:

• Class I: cash and equivalents
• Class II: marketable securities
• Class III: accounts receivable and similar items
• Class IV: stock in trade (inventory)
• Class V: depreciable tangible property (equipment, leasehold improvements)
• Class VI: Section 197 intangibles other than goodwill
• Class VII: goodwill and going concern value

Buyers want more in Class V (faster depreciation deductions). Sellers want more in Class VII (capital gains treatment). The negotiation here often happens at the LOI stage but gets formalized in the APA. We cover Form 8594 mechanics in detail in our Form 8594 instructions guide.

5. Closing matters and deliveries

What happens on closing day. Where the closing occurs (usually in escrow). What documents each party delivers:

From the seller:

• Bill of sale for tangible assets
• Assignment and assumption agreements for each contract
• Lease assignments
• Vehicle titles
• Domain transfer authorizations
• Officer's certificate of representations and warranties
• Tax clearance certificates (in some states)
• Closing financial statements

From the buyer:

• Wire transfer of cash purchase price
• Executed seller note
• Officer's certificate of buyer's representations
• Lien filings (UCC-1) where required
• Evidence of insurance assumption

Mutual:

• Executed APA (signed at close, not earlier in most SMB deals)
• Escrow agreement
• Non-compete agreements
• Transition services agreement (if applicable)
• Employment agreements with retained key employees

6. Representations and warranties

The longest section. The seller's representations and warranties to the buyer typically include:

• Organization: seller is duly organized, in good standing, has authority to enter the agreement
• Authorization: the agreement has been properly authorized
• No conflicts: signing doesn't violate any other contract, law, or governance document
• Financial statements: financials provided are accurate, prepared in accordance with GAAP (or consistent basis), and fairly present the business
• No undisclosed liabilities: other than what's on the balance sheet or disclosed in the schedules
• Tax matters: all returns filed, all taxes paid, no audits in process
• Title to assets: seller owns the assets being transferred, free and clear of liens
• Inventory: usable, salable, and valued correctly
• Accounts receivable: collectible at face value (subject to standard reserves)
• Material contracts: all listed, in full force, no defaults
• Real property: lease terms accurate, no defaults, no environmental issues
• Intellectual property: owned or licensed, no infringement claims
• Litigation: list of pending or threatened, no undisclosed
• Employees: complete list, no labor disputes, all wages paid, benefits accurate
• Compliance: business operates in compliance with all applicable laws
• Customers and vendors: no notice of material customer or vendor termination
• Insurance: complete list of policies, no claim denials
• Brokers' fees: who's owed, by whom
• Full disclosure: catch-all that no statement is materially misleading

The buyer's reps and warranties are much shorter — typically just authority, no conflicts, financial capability, and required approvals.

What buyers should focus on:

• The survival period of the reps (typically 12-24 months for SMB deals)
• The knowledge qualifier language (some reps are qualified by "to seller's knowledge", which limits seller liability)
• The materiality qualifier language (qualifying everything as "material" reduces buyer protection)

7. Disclosure schedules

Exhibits where the seller lists specific facts that qualify or carve out from the representations.

For example:

• Schedule 4.7 (Litigation): "One ongoing customer dispute with [Customer X] regarding [issue], in mediation as of [date]"
• Schedule 4.12 (Material Contracts): list of every contract over $25K annual value with key terms
• Schedule 4.15 (Employees): full headcount with name, title, hire date, base, and annual variable comp

The disclosure schedules effect: items disclosed in the schedules are deemed accepted by the buyer and cannot form the basis for an indemnification claim post-close. The litigation in Schedule 4.7 is no longer a surprise; it's a disclosed risk.

This is why the seller's incentive is to disclose extensively. The buyer's incentive is to read the schedules carefully and either negotiate price reductions for material disclosures or carve specific disclosed items out from the "deemed accepted" treatment.

Disclosure schedules typically run 30-100 pages for SMB deals. Reviewing them is the most labor-intensive part of buyer-side legal work.

8. Indemnification

What happens if a representation turns out to be false post-close.

The standard structure:

• Survival period: how long after closing the buyer can bring a claim. Typical: 12-18 months for general reps, longer for specific reps (tax, title, employee benefits often survive 3+ years or until the statute of limitations runs).
• Basket / threshold: minimum aggregate claim amount before indemnification kicks in. Typically 0.5%-1% of purchase price. Once exceeded, the buyer may recover from the first dollar (a "tipping basket") or only the excess (a "deductible basket").
• Cap: maximum aggregate liability for general reps. Typically 10-25% of purchase price for SMB deals. Specific reps (especially fraud and fundamental reps like title and authorization) are usually uncapped or capped at 100% of purchase price.
• Escrow: cash held in escrow at close, available for indemnification claims. Typically 5-10% of purchase price held for 12-18 months.

This is the most negotiated section after price itself. A 12-month survival with a 10% cap and a 5% escrow is buyer-friendly. A 24-month survival with a 20% cap and a 10% escrow is more buyer-friendly. Sellers push for shorter survival, lower caps, and smaller escrows.

9. Closing conditions and termination

What needs to be true for either party to close.

Common closing conditions:

• All representations true and correct as of closing (with materiality qualifier)
• All covenants performed
• No material adverse change since signing (or since LOI in some structures)
• All required consents obtained (lease, key customer, lender)
• No injunction blocking the transaction
• Lien searches clean
• Financing closed (where applicable)
• Buyer's review of disclosure schedules complete (where applicable)

Termination rights:

• Mutual consent
• Outside date passed (target close date plus extension)
• Material breach by other party
• Specific events (financing falls through, major customer terminates)

What the buyer should preserve: the right to walk if a major customer terminates between signing and closing, or if the rep of "no material adverse effect" turns out to be false at closing.

10. Post-closing covenants

Things either party agrees to do after closing.

Seller covenants (most important):

• Non-compete: typically 3-5 years, geographically defined, scope-defined
• Non-solicitation of employees: typically matching non-compete duration
• Non-solicitation of customers: matching duration
• Cooperation in transition: typically 60-90 days of seller availability
• Confidentiality: indefinite, on the business's confidential information

Buyer covenants:

• Pay seller note on schedule
• Maintain financial records that allow earn-out calculation (if applicable)
• Not to take affirmative action to depress earn-out metrics
• Honor employee severance commitments where assumed

Non-compete enforceability varies by state. California won't enforce most non-competes; Texas, Florida, and most other states will, within reasonable scope and duration. The non-compete is one of the most important seller covenants for a buyer with a competitive moat that depends on the seller's exit.

11. Tax matters

Beyond the basic reps:

• Allocation of purchase price across asset classes (Form 8594 mechanics)
• Cooperation on tax filings post-close
• Allocation of tax liabilities for the year of closing (typically prorated)
• Treatment of any tax refunds attributable to pre-closing periods (usually go to seller)
• Sales tax registration and clearance (state-specific)
• Allocation of payroll taxes through closing date

12. Miscellaneous

Boilerplate that matters more than buyers usually realize:

• Governing law and venue
• Notices (where to send, by what method)
• Entire agreement (no representations outside this document)
• Severability
• Counterparts and electronic execution
• Specific performance availability
• Waiver of jury trial (in some jurisdictions)

Where the buyer pushes: keep specific performance available (so the seller can't just pay damages and walk), and keep general liability tight even on boilerplate.

Asset sale vs. stock sale — the trade-off

The structural choice that drives most of the rest:

A stock sale becomes the right structure when:

• A material customer contract is non-assignable but transfers with entity
• A regulatory license (liquor, healthcare, financial services) is non-transferable
• The business has tax attributes (NOLs, credits) the buyer wants to preserve
• The seller insists strongly on capital gains treatment and the price differential reflects it

Otherwise, asset sale wins for the buyer in almost every SMB acquisition.

How to read an APA

The buyer's lawyer reads the entire document. The buyer's job is to read selectively but deeply on the sections that determine post-close risk:

1. Section 4 (Purchase Price) — confirm structure matches LOI; confirm allocation reflects negotiated split; confirm working capital adjustment mechanics
2. Section 6 (Reps and Warranties) — knowledge qualifiers, materiality qualifiers, survival period
3. Section 7 (Disclosure Schedules) — line by line, every disclosure tested against price expectations
4. Section 8 (Indemnification) — survival period, basket, cap, escrow size and release schedule
5. Section 9 (Closing Conditions) — ensure right to walk if material adverse change occurs
6. Section 10 (Post-Closing Covenants) — non-compete enforceability and scope
7. Section 11 (Tax Matters) — purchase price allocation locked in

For SMB deals under $5M, expect $15K-$50K per side in legal fees on the APA alone, plus $5K-$15K for disclosure schedule preparation. SBA-financed deals often run higher because of additional lender requirements.

Free APA template

A starting structure for asset purchase agreements in SMB acquisitions. Covers the 12 sections, with sample language for purchase price allocation, indemnification, and standard reps and warranties.

Download the APA template →

The template is for legal review starting point — not a substitute for transaction counsel. Even a "simple" APA on a deal under $1M typically requires meaningful negotiation around indemnification, disclosure schedules, and non-compete scope.

After the APA: closing

Once the APA is signed at closing:

1. Cash and seller note are funded
2. Bills of sale, lease assignments, and contract assignments are recorded
3. UCC-1 filings record any seller-financed security interests
4. Post-close working capital adjustment process begins (typically 60-90 day true-up)
5. Earn-out tracking begins (where applicable)
6. Indemnification escrow holds back agreed portion
7. Transition services arrangement runs for the agreed period

The deal isn't really closed until working capital is trued up and any closing-period disputes are resolved. Most SMB deals fully resolve within 90-120 days post-close.

For the document that came before this one, see our letter of intent guide. For the document the seller sent to attract you in the first place, see our confidential information memorandum guide. For the financial diligence that should run in parallel with APA negotiation, our SDE calculation guide walks through the earnings analysis that drives both the price and the indemnification.