Asset purchase agreements (APAs) are popular tools for acquiring a business without taking on its debts. But buyers in Los Angeles must be cautious—hidden liabilities can still sneak through. Understanding how to spot and avoid these pitfalls is essential to protecting your investment.
What Is an Asset Purchase Agreement?
APA vs. Stock Purchase
Unlike a stock purchase where you buy ownership of a company (and all its liabilities), an APA allows you to purchase specific assets—such as equipment, trademarks, or inventory—without automatically assuming all liabilities.
Common Assets Acquired
These can include intellectual property, contracts, real estate, and customer lists, depending on the nature of the business and the terms negotiated.
Common Hidden Liabilities in APAs
Unassumed Contracts
Even if a buyer doesn’t assume specific contracts, problems can arise from supplier agreements or leases that include assignment clauses, requiring consent that may not be easy to obtain.
Tax Obligations
Outstanding sales, payroll, or franchise taxes from before the purchase may follow the assets if not carefully excluded and addressed.
Employee Claims
Issues like unpaid wages, benefits, or wrongful termination claims from the seller’s employees can result in unexpected liabilities if the employees are retained post-sale.
Environmental and Regulatory Issues
Environmental liabilities tied to real property or non-compliance with local regulations can be inherited if due diligence is not thorough.
How to Avoid Hidden Liabilities
Due Diligence Is Key
Conduct comprehensive reviews of tax filings, employment records, contracts, and compliance history. It’s not enough to rely on what the seller discloses.
Clear Contract Language
Spell out in the APA exactly what liabilities you are and are not assuming. Ambiguity can lead to costly disputes.
Indemnification Clauses
Include strong indemnity provisions requiring the seller to cover certain post-sale liabilities. Consult a business attorney to draft enforceable language.
Hidden liabilities can derail what seems like a great asset purchase. If you’re considering buying a business in Los Angeles, Law Advocate Group, LLP can help. Contact us today. Our attorneys will guide you through due diligence and contract negotiations to protect your interests.
