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Anatomy of an Asset Purchase Agreement…

By November 12, 2013January 14th, 2022Buying a Practice, Selling A Practice

In this blog, we break down, in simple terms, what a typical asset purchase agreement (to purchase the assets of a dental practice) will look like.

Introduction

The Introduction identifies the nature of agreement, the date of the agreement and the parties involved. The parties could be human beings, corporations, partnerships, estates, or human beings in trust for a corporation to be incorporated at some future time and without personal liability.

Background

The Background section provides context to the deal. This will typically include identifying the dental practice and whether assets or shares are being bought/sold.

Articles

  • Article I –Definitions and Interpretation: defines key terms used throughout the rest of the Agreement.
  • Article II – Purchase of Assets: identifies the purchase price (including allocation), how it will be paid, and adjustments. Importantly, as per my previous blog about HST, it is in the Purchaser’s best interests to have the least amount allocated to leaseholds (as HST will be payable) and the most amount attributed to equipment. This is a negotiation point, but the Purchaser should be mindful of it.
  • Article III – Closing Arrangements: explains the mechanism for closing the transaction (when, where, how, etc.).
  • Article IV – Vendor Indemnities: the Vendor agrees to be responsible to the Purchaser for liabilities that occurred BEFORE the closing; the Purchaser agrees to be responsible to the Vendor for liabilities that occur AFTER the closing.
  • Article V – Employee Matters: this may include things like a requirement that the Vendor provide notice or payment in lieu of notice to their staff prior to the closing; the purchaser offering / maintaining employment to the existing employees after the Closing; and who will be responsible for termination costs after the closing (e.g. Vendor for the first three months, Vendor and Purchaser for the next three months equally, and Purchaser after the first six months after closing).
  • Article VI – Accounts Receivable: if accounts receivable aren’t included in the deal (which is typical), the Purchaser will remit those accounts receivable they collect to the Vendor every month. The Vendor will give the Purchaser a list of Accounts Receivable on the Closing Date.
  • Article VII – Work in Progress: Vendor will give a list of work in progress, etc.
  • Article VIII – Representations and Warranties of the Vendor: these are promises made by the Vendor about the Dental Practice, the Assets, the Employees, the Financial Statements, the Patients, etc., that are supposed to be true and which the Purchaser is relying upon to enter into this agreement.
  • Article VIXRepresentations and Warranties of the Purchaser: these are promises made by the Purchaser about the Purchaser that are supposed to be true and which the Vendor is relying upon to enter into this agreement.
  • Article X – Interim Operation of the Dental Practice: from the time the parties sign the Asset Purchase Agreement up until the closing, the Vendor will continue to maintain the Dental Practice (e.g. book new patients, maintain assets, not remove patient records, etc.).
  • Article XI – Access to Books, Records, Etc.: the Purchaser will be given access to books, records, etc. about the Assets, Dental Practice, and Vendor in order to complete the deal. The Vendor will also be required to maintain records (which it doesn’t provide to you as part of the deal) and give the Purchaser access to them if required, for example, for tax or litigation matters or matters of professional accountability.
  • Article XII – Covenants of the Vendor: the Vendor agrees to do certain things (e.g. get discharges for any debt registrations, transfer phone numbers after the closing, provide a letter of introduction, allow you to continue using the principal dentist’s name after the closing for one year, etc.).
  • Article XIII – Conditions of Closing – Purchaser: these are the conditions of closing (e.g. getting financing, being satisfied with a chart audit/equipment inspection/accounting due diligence, buying the real estate as a separate transaction, etc.) which must be satisfied or waived by the Purchaser in order for the Purchaser to close the deal.
  • Article XIV – Conditions of Closing – Vendor: these are the conditions of closing which must be satisfied in order for the Vendor to close the deal.
  • Article XV – Restrictive Covenants: these are the non-compete and non-solicitation provisions.
  • Article XVI – General Terms: these are standard terms that govern the agreement.

Schedules

Schedules form part of the agreement. These may include things like the appraisal, excluded assets, employee information, financial statements, material contracts, and the lease.

So there you have it—a synopsis of a typical asset purchase agreement. But don’t kid yourself if you think this is straightforward. Every day is so very different and depends on its unique circumstances. There are so many nuances and pitfalls. If you’re looking for a dental lawyer to help you draft and negotiate an asset purchase agreement that promotes your interests and protects your rights, contact DMC.

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