An Asset Purchase Agreement is a transactional contract used when a buyer acquires specific assets of a business rather than purchasing the entity's stock or membership interests. Unlike a stock purchase where the buyer assumes all liabilities of the target company, an asset purchase allows the buyer to selectively acquire tangible assets (equipment, inventory, real property) and intangible assets (intellectual property, customer lists, trade names, contracts) while leaving unwanted liabilities with the seller.

This structure is governed primarily by state commercial law, including UCC Article 2 for goods and UCC Article 9 for secured transactions involving collateral. The buyer must conduct a UCC lien search to identify any existing security interests on the assets being purchased. Under the bulk sales provisions (still applicable in some states under UCC Article 6), buyers of substantially all business assets may need to notify the seller's creditors before closing.

Asset purchases are the preferred acquisition structure in most small-to-mid-market business transactions because they offer the buyer a stepped-up tax basis under IRC Section 1060, allowing depreciation and amortization of the acquired assets at their fair market value. The agreement must include an allocation of the purchase price among asset categories per IRS Form 8594 reporting requirements. Both buyer and seller must file consistent allocations with the IRS, making this provision legally significant.

When acquiring a small business and wanting to avoid inheriting unknown liabilities such as pending lawsuits, tax obligations, or environmental cleanup costs that would transfer automatically in a stock purchase. When a buyer wants to cherry-pick valuable assets like equipment, customer relationships, and intellectual property while excluding obsolete inventory or unfavorable contracts.

When purchasing assets from a distressed or bankrupt business under Section 363 of the Bankruptcy Code, which allows sales free and clear of liens and encumbrances. When a competitor is exiting a market and selling its production equipment, customer base, and brand assets but the buyer does not want the seller's corporate entity. When restructuring operations by spinning off a division and selling its assets to a third party.

Without a properly drafted Asset Purchase Agreement, the buyer risks inheriting successor liability under state law, failing to obtain clear title to purchased assets, or facing IRS challenges to the purchase price allocation that could result in significant tax consequences for both parties.

Asset schedule and exclusions -- create a detailed schedule listing every asset included in the sale (equipment with serial numbers, IP registrations, assigned contracts, customer lists) and a separate schedule of excluded assets. Ambiguity about what is being sold is the most common source of post-closing disputes in asset transactions.

Purchase price and allocation -- specify the total purchase price and how it is allocated among asset classes per IRS Form 8594 categories (Class I through VII). Both parties must agree to report consistent allocations on their respective tax returns under IRC Section 1060.

Representations and warranties -- the seller must represent that it has clear title to the assets, that the assets are free of liens and encumbrances (or disclose existing security interests), that financial statements are accurate, and that there are no pending or threatened lawsuits affecting the assets.

Bulk sale compliance -- determine whether the transaction triggers bulk sale notification requirements under the applicable state's adoption of UCC Article 6. Failure to comply can make the buyer liable to the seller's creditors.

Assignment and consent requirements -- identify contracts, leases, and licenses that require third-party consent for assignment. Under common law, most contracts are assignable unless they contain anti-assignment clauses or involve personal services.

Non-compete and transition provisions -- include seller's non-competition covenant with reasonable geographic and temporal restrictions (enforceability varies by state; California generally prohibits non-competes under Business and Professions Code Section 16600). Define transition assistance obligations including employee training and customer introductions.

Closing conditions and due diligence -- specify conditions precedent to closing such as satisfactory completion of due diligence, regulatory approvals, landlord consents, and clearance of UCC liens. Include provisions for purchase price adjustments based on final inventory counts or accounts receivable verification.

Indemnification -- establish post-closing indemnification obligations, survival periods for representations and warranties (typically 12-24 months), indemnification caps and baskets (deductible thresholds), and escrow holdback provisions.