A buyer wants your product, and the letter of intent (LOI) says the deal will close as an asset purchase. However, many founders treat the asset purchase agreement (APA) as paperwork that simply follows the price. In reality, the APA decides which assets you hand over, which debts stay behind with your company, and how much of the purchase price reaches you after tax, escrow, and adjustments.

I’ve been a software founder twice, and as a startup lawyer, I now represent founders on the selling side of these deals. Below is what an APA contains and where you should push.

What Is an Asset Purchase Agreement?

Start with the definition, because the structure explains almost everything that follows.

An asset purchase agreement is the contract under which your company sells some or all of its assets to a buyer. The buyer receives the items the agreement lists and takes on only the liabilities it expressly agrees to assume, which are also listed on a schedule to the APA. Your company, the legal entity itself, stays with you, along with whatever the buyer did not take.

The alternative is a stock purchase agreement (SPA), where the buyer purchases shares directly from your stockholders and ownership of the whole company changes hands. I wrote about choosing a stock or asset purchase as a structuring question; here the buyer has already chosen the asset route, and the question is what the agreement should say.

Why Do Buyers Prefer an Asset Purchase?

Buyers ask for an asset deal for two reasons: liability and tax, and both shift value toward the buyer’s side.

On liability, the buyer picks what it takes and leaves the rest inside your company, including claims nobody has discovered yet. On tax, the buyer’s basis in each asset is set by the share of the price allocated to it under Section 1060 of the Internal Revenue Code. Goodwill and most acquired intangibles are then amortized over a 15-year period under Section 197, giving the buyer deductions it would not get by buying your stock.

What those benefits cost you depends on whether your company is a C-Corp, a limited liability company (LLC), or an S corporation (S-Corp).

What an Asset Sale Costs a C-Corp Seller

A C-Corp that sells its assets pays federal corporate income tax on the gain, at the 21% rate set by Section 11 of the Internal Revenue Code, plus any state corporate tax. When the company later distributes the remaining cash and liquidates, Section 331 treats that distribution as payment in exchange for the stockholders’ shares. The same sale proceeds are then taxed again, this time at the stockholder level.

Here is a simplified, hypothetical illustration. Assume a $10M asset sale, a $1M tax basis in the assets, and no state tax, escrow, or deal costs:

1. 1Corporate gain on the sale: $10M minus $1M, or $9M.
2. 2Federal corporate tax at 21%: $1.89M.
3. 3Cash left to distribute to stockholders: $8.11M, before their own tax on the liquidating distribution.

In a stock sale at the same price, the stockholders sell their shares directly, so that $1.89M corporate-level layer would not arise. Qualified Small Business Stock (QSBS) adds a second wrinkle. The Section 1202 exclusion reaches only an individual or other non-corporate holder’s gain on qualifying shares, which means it does nothing for the corporation’s own tax on an asset sale.

How I handle this: when a buyer insists on an asset deal for a C-Corp client, I raise the tax gap in the LOI and ask for the purchase price to reflect it. Whether any of the stockholder-level gain on liquidation qualifies for QSBS is a question for your tax advisor, and I’m happy to introduce you to a CPA who works on exits.

What Changes for an LLC or S-Corp Seller

An LLC taxed as a partnership, or an S-Corp, generally passes the gain through to its owners, so an asset sale usually produces one level of federal income tax at your personal level, not the corporate level, instead of two. The buyer still gets its new basis, which is one reason asset deals are so common for these entities.

The pressure point moves to the allocation. How the price is split across assets can change how much of your gain is taxed at ordinary income rates versus capital gains rates, so the allocation clause covered below deserves more attention from you than the headline number.

What Are the Main Sections of an Asset Purchase Agreement?

Most APAs follow the same skeleton, and the buyer’s lawyers usually write the first draft. Here is each section, what it does, and where I push back on behalf of a seller.

Legally, you only get what’s written into your contract. Every row above is a place where one sentence in the buyer’s draft can move money from your side of the deal to theirs.

Which Assets Transfer and Which Stay With You?

The asset schedule is the heart of the deal, and for a software company it looks very different from the equipment-and-inventory lists in most templates.

The Software Company Asset Checklist

In a software-as-a-service (SaaS) deal, the buyer’s schedule of purchased assets will usually include:

• ●Source code, repositories, build tooling, and technical documentation
• ●Trademarks, copyrights, patents, trade secrets, and any applications to register them
• ●Domain names, social media handles, app store developer accounts, and cloud hosting accounts
• ●Customer contracts, order forms, and the statements of work under them
• ●Vendor contracts and third-party licenses the product depends on
• ●Customer and user data, to the extent your privacy policy and contracts allow it to be transferred
• ●Goodwill associated with the product

Assets that typically stay with your company:

• ●Cash and cash-equivalents
• ●Tax refunds and tax records for pre-closing periods
• ●The corporate minute book, equity records, and the entity itself
• ●Insurance policies
• ●Your company’s rights under the APA
• ●Anything used only by a product line you are keeping

Watch the catch-all clause that transfers “all assets used in the Business.” If “Business” is defined broadly, the clause can pull in an internal tool, a domain, or a second product you never meant to sell. On user data, read what your privacy policy and customer contracts promised about transfers before you list that data as a purchased asset, and fix any gap with notice or consent where those documents require it.

IP Transfer Formalities

Each type of IP has its own transfer rule under federal law, and the buyer’s IP assignment has to satisfy all of them.

You can only sell what your company owns. If a contractor wrote part of your codebase and never signed a written document assigning that work to your company, the company may not own that code, and your IP representation in the APA would be untrue on the day you sign it. The fix is to go back now and have every contractor and former employee sign a confirmatory IP assignment; I cover more of this in managing IP risk in acquisitions.

How Do Assumed and Excluded Liabilities Work?

The liability clauses decide who pays for problems after closing, and the buyer’s first draft usually draws that line as narrowly as it can.

A typical buyer draft lists a short set of “Assumed Liabilities” and treats everything else as an “Excluded Liability” that stays with your company. Excluded items usually include pre-closing taxes, pre-closing claims and lawsuits, company debt, and obligations to your employees through closing. I would rather draw the line by time: the buyer assumes every obligation under the contracts it receives that arises after closing, and your company keeps what arose before.

Lenders with a security interest in your assets will need to be paid off at closing. Expect the buyer to require payoff letters and lien releases so the assets arrive free and clear.

An asset deal reduces the buyer’s exposure, though in limited circumstances courts in some states can still hold an asset buyer responsible for a seller’s obligations. Buyers answer that risk with indemnification and escrow. That is why the liability section and the indemnification section get negotiated together, and why a concession in one usually shows up as a request in the other.

What Happens to Customer Contracts That Cannot Be Assigned?

In an asset deal, every customer contract has to be assigned from your company to the buyer, and some contracts do not allow that freely.

Many enterprise agreements contain an anti-assignment clause, which means the contract cannot be assigned without the customer’s consent. Without that consent, the buyer may not receive a contract it is paying for, so expect the buyer to ask for a lower purchase price, a larger escrow, or a closing condition. Getting the customer’s consent to assign the contract to the buyer resolves it.

Your own terms may help. Many self-serve SaaS terms of service let the provider assign the agreement in connection with a sale of its business, so check your clickwrap terms before assuming you need consent from hundreds of small customers.

Here is the consent plan I use:

1. 1Pull every customer and vendor contract and sort it by assignment language: freely assignable, assignable on a sale of the business, assignable only with consent (and some agreements may say that consent “may not be unreasonably withheld”), or silent (where the default rule depends on the governing law).
2. 2Agree with the buyer which consents are closing conditions, and keep that list to the customers that matter most to revenue.
3. 3Coordinate the consent requests with the buyer so customers hear one consistent message about the sale.
4. 4For any consent still outstanding at closing, add a clause under which your company holds the contract and passes its benefits and burdens to the buyer until consent arrives, where the contract permits that arrangement.

Note: In some cases, the buyer may opt to terminate the customer or supplier contract and enter into a new contract with the customer or supplier.

How Is the Purchase Price Paid and Allocated?

The headline figure in the LOI is really several payments made at different times, on different conditions, and taxed according to an allocation you agree to.

Cash at Closing, Escrow, and Earnouts

The purchase price usually arrives in pieces:

• ●Cash at closing: the only part you control with certainty.
• ●Escrow or holdback: part of the purchase price held back to cover indemnification claims; if a claim succeeds, you can be required to forfeit that part of the purchase price in escrow.
• ●Earnout: a contingent payment tied to the business hitting post-closing targets.

I treat earnouts as risk. Once the buyer runs the business, you no longer control whether it hits the targets, so push as much value as you can into cash at closing. Where an earnout stays, define every metric and accounting method, restrict how the buyer can operate the business in ways that defeat the targets, and ask for the earnout to accelerate if the buyer sells the business or terminates you without cause.

Deferred Revenue and Working Capital

SaaS customers often prepay annual subscriptions. Your company has already collected that cash, but the buyer will be the one servicing those customers for the rest of the term.

Buyers commonly respond by asking for a purchase price reduction tied to that obligation, either directly or through a working capital adjustment. Negotiate how deferred revenue is measured, agree on a working capital target, and attach a sample calculation to the APA so the closing math cannot be argued later.

The Form 8594 Allocation

When a buyer acquires the assets of an operating business to which goodwill could attach, the buyer and the seller each generally attach Form 8594 to their income tax returns, according to the Internal Revenue Service (IRS) instructions for Form 8594. The price is allocated using a residual method across seven asset classes, starting with cash in Class I and ending with goodwill and going concern value in Class VII. If the price later changes, for example, when an earnout pays out, the change is reported on a supplemental Form 8594.

Section 1060 adds the part many founders overlook: if you and the buyer agree in writing on the allocation, that agreement binds both of you unless the IRS determines it is not appropriate. Settle the allocation schedule, or at least the method, with your CPA before signing.

Which Approvals Does an Asset Sale Need?

An asset sale needs sign-off from people inside and outside the company, and missing one can stall a closing.

Those are Delaware’s rules. If your company is incorporated in another state, that state’s corporate statute sets its own approval requirements.

Selling one product line while keeping the rest of the business may fall short of “substantially all” of your assets, in which case the stockholder vote may not apply. Have your lawyer make that call in writing before you rely on it.

What Happens to Your Employees in an Asset Sale?

Your team does not transfer automatically, because the employer (your company) is not the thing being sold.

The usual sequence is that the buyer makes offers to the people it wants, and your company ends their employment at closing and pays final wages and any accrued amounts your state’s final-pay rules require. Note that not all current employees may receive offers from the buyer, nor is the buyer required to take on any of the seller’s employees, but usually they will want at least some of them. Check your equity plan as well, since it controls what happens to unvested options when the company sells its assets. Keeping the people the buyer is paying for is its own negotiation, and I wrote about retaining employees after an acquisition from that angle.

Larger companies have a federal notice rule to plan around. The Worker Adjustment and Retraining Notification (WARN) Act covers employers with at least 100 employees other than part-time workers and generally requires 60 days’ written notice before a plant closing or mass layoff. In a sale of all or part of a business, the WARN Act’s sale provision puts notice duties on the seller through the effective date of the sale and on the buyer afterward; some states have their own notice laws with different thresholds.

Which Promises Survive Closing?

Closing is not the end of your obligations. These are the commitments that follow you after the money moves:

• ●Representations and warranties. Statements of fact about the business that, if untrue, can lead to indemnification claims. Think of the disclosure schedules as an insurance policy. An issue you have disclosed generally cannot support a later breach claim by the buyer, so when in doubt, disclose it.
• ●Indemnification. Your promise to cover the buyer’s losses from breaches and excluded liabilities, or from third-party claims brought against the buyer for events occurring prior to the closing, as limited by a cap, a basket, and a survival period.
• ●Non-compete and non-solicit. Buyers usually ask the selling company, and often its founders, to stay out of the business for a period. California, which voids most non-competes, has a statutory exception in Business and Professions Code Section 16601 for owners selling all or substantially all of a company’s operating assets together with its goodwill, limited to the geographic area where the business was carried on.
• ●Transition services. A TSA covers the help you provide after closing, which can include bringing the buyer up to speed and introducing them to existing clients. If it requires substantial time and effort, it warrants separate pay.
• ●Name change. When the buyer purchases your trade name, the APA often requires your company to change its corporate name after closing.

What Happens to Your Company After the Assets Are Sold?

After an asset sale, you still own a company with cash, obligations, and paperwork to finish. The wind-down usually runs in this order:

1. 1The closing payment lands in the company’s bank account. Stockholders receive nothing until the company distributes it.
2. 2The company pays its excluded liabilities: remaining debt, final payroll, vendor bills, and taxes.
3. 3The company files its final tax returns, including Form 8594 with its return for the year of the sale.
4. 4The company changes its name if the trade name was sold.
5. 5The company holds back reserves for escrow releases and possible indemnification claims during the survival period.
6. 6The company distributes what remains to stockholders in the order your charter sets, which in most venture-backed companies means preferred stockholders’ liquidation preferences are paid first.
7. 7The company dissolves under the corporate law of its state once claims are resolved.

How to Prepare Your Side of the Asset Purchase Agreement

Most of your negotiating strength in an APA is built before the buyer’s draft arrives. These six steps put you in a stronger position.

1Settle the Structure in the LOI

Once the LOI is signed, roughly 90% of the deal is effectively decided, in my experience. When an LOI calls the escrow and indemnity terms “customary,” get the actual numbers written in before you sign, since every deal sets its own.

2Clean Up Contractor and Employee IP Assignments

Collect a signed assignment of ownership to your company from every founder, employee, and contractor who wrote code or created content. Fill gaps with confirmatory assignments before diligence starts.

3Build a Contract Assignment Map

Sort every customer and vendor contract by its assignment language and identify the consents you will need. Bring the list to the first negotiation of closing conditions.

4Model the After-Tax Number With Your CPA

Compare what you net from the asset deal against a stock sale at the same price, including any corporate-level tax, state tax, and the effect of the allocation.

5Draft the Disclosure Schedules Early

Start the schedules while you build the data room. If you bring a problem up yourself, you can usually manage it; a problem the buyer finds on its own can create suspicion and lead the buyer to negotiate down the purchase price.

6Review Every Ancillary Document

The bill of sale, the IP assignment, the assignment and assumption agreement, and the TSA all bind you. Have an acquisition lawyer review any broker or banker in-house template forms before signing them, too. My acquisition transaction support covers each of these documents.

Frequently Asked Questions

Short answers to the questions founders ask me most about the APA itself.

Conclusion

An APA is where the buyer’s wish for a clean, tax-efficient purchase meets your interest in keeping what you earned. The buyer chooses what it takes; you choose what you agree to keep, approve, and promise.

Before you sign, read the asset schedule, the liability split, the allocation, and the consent plan, and confirm the price still holds after tax and escrow. Go out there and build something great. When it is time to sell, make sure the terms protect what you built.