FBA business owners who have decided to enter into asset purchase agreements with a buyer, as outlined in Part 1 of our series, should understand the various levels of an asset purchase transaction and what will be needed in order to close the transaction. Here are the key steps involved in an asset purchase transaction:
1. Define the Parameters of the Transaction – Definitions and Exhibits
This is a crucial first step. The purchaser will want to make sure that it is acquiring every single asset, right, or relationship that is needed to properly and profitably run the FBA business. These assets, rights, and relationships are central determinants in what the purchaser is willing to pay for the business being acquired. On the other hand, the seller will have an interest in complying with the Asset Purchase Agreement (APA)’s obligations in order to avoid potential indemnification obligations. For this reason, definitions such as “Business,” “Purchased Assets,” “Intellectual Property,” and “Excluded Liabilities” need to be carefully drafted and reviewed. Typically, the parties will spend a significant amount of time negotiating the key definitions and formulating a precise list of included assets and liabilities which are attached as an exhibit or schedule to the APA. Alternatively, the parties may decide to adopt a general statement such as “all assets pertaining to the business except those specifically excluded and listed here.” Liabilities are usually identified in the same way. Either the purchaser lists only the liabilities that are being assumed or assumes all liabilities except certain excluded liabilities.
2. Expect Due Diligence
Due diligence is the fundamental process by which a potential purchaser investigates all aspects of the target company or target business. These include the target company’s finances, business operations, intellectual property, and relevant legal issues. Through this process, the purchaser is able to flag any potential issues arising out of the purchase.
Sellers of FBA businesses must appreciate the importance of the due diligence process. Never underestimate the significance of the purchaser’s due diligence. Often disregarded as a time-consuming and expensive process involving lawyers and financial professionals, a seller should always ensure that all is in order before opening the doors and books of its business to a potential buyer. Flags identified during the buyer’s due diligence may result in a downward adjustment in price, further delays in complying with conditions precedent set by the buyer, post-closing covenants, or even the buyer refusing to go forward with the transaction. Knowing that your FBA business is in compliance with all relevant laws and Amazon policies, has all needed licenses and has no issues with its products will go a long way in making sure due diligence and the ensuing negotiations go smoothly and the terms of the APA less onerous.
3. Intellectual Property Cleanup Prior to the Transaction
Before opening negotiations with a potential buyer, the owner of the FBA business should always ensure that its intellectual property (patents, trademarks, copyrights, and domain names) is in order. Any ownership, inventorship, and authorship issues need to be resolved, and for important intellectual property that is not owned but licensed, the business owner should either purchase the licensed intellectual property or make sure that the license is assignable to a purchaser of the business. FBA business owners need to keep in mind that intellectual property in works created by contractors, such as photographs, artwork, and product designs, is typically owned by the contractor, not the business unless the contract specifically states otherwise. A seller does not want to learn during due diligence that it does not own the intellectual property that it intends to sell. The seller’s intellectual property is often the first thing that purchasers review during due diligence, before carrying out their due diligence on the company’s finances and operations, highlighting the importance of intellectual property in this process.
4. Ancillary Agreements and Third-Party Consents
In light of the nature of an asset deal as opposed to a share deal, additional ancillary agreements will need to be executed at closing by the parties. These include:
- Bill of sale: Typically delivered as an ancillary document in an asset purchase to transfer title to tangible personal property such as the seller’s inventory. It does not cover intangible property such as intellectual property, contract rights, or real property.
- Assignment and assumption agreement: Transfers of intangible property are typically effected through this type of agreement, whereby the seller (assignor) transfers its rights, obligations, and benefits in its contracts and business relationships to the buyer (assignee). While intellectual property is a type of intangible property, it is not transferred through an assignment and assumption agreement. Rather, the intellectual property is transferred through another ancillary agreement, a separate assignment of the intellectual property.
In the context of the existing commercial relationships that will be transferred as part of the sale of the business, such as supply and service agreements, sellers should be aware that numerous third-party consents are often required to implement the transaction. Since most agreements contain anti-assignment clauses, an FBA seller, once it knows that it wants to sell its business, should promptly start reviewing the relevant agreements to identify such clauses and obtain the needed consents. This can be a time-consuming process that is often overlooked and can delay or even kill (in the event that key consents cannot be obtained) the transaction.
5. Consider Your Employees (if any)
Often FBA businesses do not have a significant number of employees or any employees at all except for the owner. However, if the business does employ personnel, the mechanics of the termination (on seller’s side), and re-hiring (on buyer’s side) of such employees should be properly and promptly addressed both from a contractual and logistical perspective.
6. Migration Process
In the sale of an FBA business, a primary aspect the seller will need to focus on is the migration process, which is the operational transition of the business from the seller to the buyer. This is typically regulated through an attached schedule (checklist) to the APA providing timing and tasks and it is related to a provision in the APA. This provision will set forth the seller’s obligations before and after the deal closes and the conditions for the purchaser’s release of portions of the purchase price once certain tasks or conditions are completed or met. In an asset deal, this process is even more important because the collaboration of the entity (whose ownership is not transferred) will be needed in transitioning the control over all Amazon and other e-commerce accounts and inventory being purchased by the buyer.
7. Transitional Assistance
As noted above, without a transfer of ownership in the entity owning the business, an APA typically requires the seller to provided post-closing transitional assistance such as smoothing relationship issues with suppliers, employees, and other relevant third-parties.
8. Representations and Warranties – A Different Approach
As for risk allocation, representations, warranties, and related indemnification provisions, the core of the APA is conceptually very similar to the representations made by the seller in a share purchase agreement. The main difference will be, again, in the parameters identified in the asset deal. A key clause in this context is the “Sufficiency of Assets” representation in which the seller states that all of the assets identified in the APA that are to be transferred are not only are owned by the seller but also that they constitute all of the assets – and all of the intellectual property – necessary to operate the business as presently conducted or proposed to be conducted. Other representations that an aggregator or other purchaser will want to include and have warrantied by the seller will pertain to the validity, enforceability, and effectiveness of the assignment of the contractual relationships, the third-party consents, and the other rights that are within the defined business being purchased.
On the other hand, issues that do not relate to the core of the business to be purchased. i.e., the assets to be acquired, such as corporate taxes, environmental issues, product liability for product lines not transferred, or ongoing litigations not related to the transferred assets will typically not be as strong and strict as they would be in stock deal.
9. Bulk Sales Law
Sellers need to be aware that some states require compliance with bulk sales laws. In general, bulk sales laws require certain notifications to be made to the seller’s creditors or relevant authorities before the deal closes. Compliance is needed to ensure that the buyer is not held liable for any of the seller’s unpaid sales or use taxes or for the buyer to avoid assuming additional liabilities.