Part 2: The Key Steps of an Amazon FBA Business Asset Purchase Transaction | Tarter Krinsky & Drogin LLP
FBA business owners who have decided to enter into asset purchase agreements with a buyer, as discussed in Part 1 of our series, need to understand the different levels of an asset purchase transaction and what which will be necessary to complete the transaction. Here are the main steps in an asset purchase transaction:
1. Set Transaction Parameters – Definitions and Supporting Documents
This is a crucial first step. The buyer will want to ensure that they are acquiring every asset, right, or relationship necessary to properly and profitably run the FBA business. These assets, rights and relationships are key determinants of what the buyer is willing to pay for the acquired business. On the other hand, the seller will have an interest in respecting the obligations of the Asset Purchase Agreement (APA) in order to avoid possible indemnification obligations. For this reason, definitions such as “Business”, “Purchased Assets”, “Intellectual Property” and “Excluded Liabilities” need to be carefully drafted and revised. Typically, parties will spend a lot of time negotiating key definitions and formulating a specific list of included assets and liabilities that are attached as an exhibit or schedule to the PPA. Alternatively, the parties may decide to adopt a general statement such as “all assets owned by the business, except those specifically excluded and listed here”. Liabilities are generally identified in the same way. Either the buyer lists only the liabilities that are assumed, or it assumes all liabilities except for certain excluded liabilities.
2. Expect Due Diligence
Due diligence is the fundamental process by which a potential buyer investigates all aspects of the target business or target company. These include finance, business operations, intellectual property and relevant legal matters of the target company. Through this process, the buyer is able to report any potential issues arising from the purchase.
FBA business sellers should appreciate the importance of the due diligence process. Never underestimate the importance of buyer due diligence. Often overlooked as a long and expensive process involving lawyers and finance professionals, a seller should always make sure everything is in order before opening the doors and books of their business to a potential buyer. Flags identified during buyer’s due diligence may result in downward price adjustment, further delays in meeting buyer’s conditions precedent, post-closing covenants, or even denial of buyer to continue the transaction. Knowing that your FBA business complies with all applicable laws and Amazon policies, has all necessary licenses, and has no issues with its products will go a long way to ensuring due diligence and subsequent negotiations take place. smoothly and the terms of the APA less cumbersome.
3. Cleanup of IP before transaction
Before opening negotiations with a potential buyer, the FBA business owner should always ensure that their intellectual property (patents, trademarks, copyrights, and domain names) is in order. All ownership, inventor and authorship issues must be resolved, and for significant intellectual property that is not owned but licensed, the business owner must either purchase the licensed intellectual property or ensure that the license is transferable to a purchaser of the business. FBA business owners should keep in mind that the intellectual property of works created by entrepreneurs, such as photographs, illustrations, and product designs, generally belongs to the entrepreneur, not the business. unless otherwise specified in the contract. A seller does not want to learn during due diligence that he does not own the intellectual property he intends to sell. The seller’s intellectual property is often the first thing buyers consider during due diligence, before performing 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
Given the nature of an asset transaction as opposed to a stock transaction, additional side agreements will need to be executed at closing by the parties. These include:
- Bill of Sale: Usually 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 assets such as intellectual property, contractual rights or real estate.
- Assignment and Assumption Agreement: Transfers of intangibles are usually made 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). Although 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 side agreement, a separate assignment of the intellectual property.
Under existing business 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 they know they want to sell their business, should quickly start reviewing the relevant agreements to identify these clauses and obtain consents. required. This can be a time-consuming process that is often overlooked and can delay or even kill (in the event 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 no employees except the owner. However, if the company employs staff, the mechanisms for terminating (on the seller’s side) and rehiring (on the buyer’s side) those employees must be properly and promptly addressed from a contractual and logistical perspective.
6. Migration Process
When selling 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 seller to buyer. This is usually regulated by a schedule attached (checklist) to the APA indicating the timetable and tasks and it is linked to a provision of the APA. This provision will set out the obligations of the seller before and after the closing of the transaction and the conditions for the release by the buyer of portions of the purchase price once certain tasks or conditions are completed or fulfilled. In an asset transaction, this process is even more important because the collaboration of the entity (whose ownership is not being transferred) will be required to transfer control over all Amazon and other e-commerce accounts and inventory purchased by the buyer.
7. Transitional Assistance
As noted above, without a transfer of ownership from the entity owning the business, an APP typically requires the seller to provide transitional assistance after closing, such as smoothing out relationship issues with vendors, employees and other relevant third parties.
8. Representations and Warranties – A Different Approach
With respect to the allocation of risk, representations, warranties and related indemnification provisions, the core of the APP is conceptually very similar to the representations made by the seller in a stock purchase agreement. The main difference will reside, once again, in the parameters identified in the transfer of assets. A key clause in this context is the “sufficiency of assets” statement in which the seller declares that all assets identified in the APP to be transferred are not only the property of the seller, but also constitute all assets . – and all intellectual property – necessary to operate the business as presently carried on or proposed. Other representations that an aggregator or other buyer will want to include and have guaranteed by the seller will relate to the validity, applicability and effectiveness of the assignment of contractual relationships, third party consents and other rights that are in the company defined in the process of purchase.
On the other hand, questions that do not concern the heart of the company to buy. that is, assets to be acquired, such as corporate taxes, environmental matters, product liability for product lines not transferred, or pending litigation unrelated to the transferred assets will not be generally not as solid and strict as they would be in the case of a stock market transaction.
9. Wholesale Law
Sellers should be aware that some states require compliance with wholesale laws. In general, wholesale laws require that certain notices be made to the seller’s creditors or to the competent authorities before the transaction is concluded. Compliance is necessary to ensure that Buyer is not held liable for Seller’s unpaid sales or use taxes or for Buyer to avoid incurring additional liability.