The short answer: The Asset Purchase Agreement (APA) is the definitive, binding contract for an asset sale. Its core moving parts are reps & warranties (the seller's promises about the business, usually 25 to 40 of them), indemnification (how you recover if a promise is false), escrow (typically ~10 to 15% held back to back those claims), covenants (non-compete, transition), and closing conditions. This is the document where a diligence finding becomes real protection, and where you need a deal lawyer.
What the APA does
Your LOI set the framework; the APA is the framework made binding and complete. It states the price and payment, lists exactly which assets you're buying and which liabilities you're assuming, and, most importantly, allocates the risk of everything you couldn't fully verify in diligence. Every hour your attorney spends here is cheaper than one uninsured liability.
Diligence tells you what's wrong. The purchase agreement decides who pays for it.
The key terms
| Term | What it does | Buyer's angle |
|---|---|---|
| Purchase price & allocation | Sets the number and splits it across asset classes | Allocation affects your future depreciation, push for a favorable split |
| Assets & assumed liabilities | Exactly what transfers and what you take on | Keep the assumed-liabilities list short and specific |
| Reps & warranties | Seller's factual promises (25 to 40 of them) | Broad, specific reps = more recovery if something's false |
| Disclosure schedules | Seller's exceptions to the reps | Read every line, this is where problems get "disclosed" |
| Indemnification | Your remedy if a rep is false | Watch survival period, caps, and baskets |
| Escrow / holdback | ~10 to 15% held to fund claims | Real money you can reach without suing |
| Covenants | Non-compete, non-solicit, transition | Reasonable scope so they're enforceable |
| Closing conditions | What must be true to close | Financing, lease consent, no material change |
Reps & warranties, in plain English
A representation is a statement of fact ("the financial statements are accurate," "there are no undisclosed liabilities," "the company owns its IP"), and a warranty is the promise that it's true. A typical small-business deal has 25 to 40 of them. If one turns out to be false and it costs you money, the reps are what give you a claim. The most important ones for buyers:
- Financial statements are accurate and fairly present the business.
- No undisclosed liabilities beyond what's in the financials and schedules.
- Contracts are disclosed, in good standing, and assignable.
- Clean title to the assets, free of liens.
- Taxes are filed and paid; no pending audits.
- No undisclosed litigation.
Indemnification & escrow, your safety net
Reps mean little without a way to enforce them. Indemnification is that mechanism: if a rep is false, the seller must make you whole. Three dials to watch:
- Survival period, how long after close you can still bring a claim (often 12 to 24 months; longer for taxes and title).
- Cap, the maximum the seller must pay back.
- Basket, a minimum threshold before claims kick in (a deductible).
And because chasing a seller for cash after close is painful, buyers back indemnities with an escrow holdback, commonly 10 to 15% of the price, held by a third party so the money is actually there.
Covenants that protect the value
A non-compete and non-solicit stop the seller from rebuilding the business next door, and a transition/training plan keeps owner-dependent value from walking out the door. Keep scope reasonable so courts enforce them.
Get a deal lawyer, no exceptions
The APA is not a template exercise. A transactional attorney who does small-business M&A should draft or heavily mark up the agreement, disclosure schedules, and closing documents. Templates like our LOI and seller-note term sheet are great for the early stages; the definitive agreement is where you pay for real legal work. Once it's signed, you head to closing day.
Understand the mechanics behind the APA
Escrow, earnouts, and the working-capital peg all live inside these terms, here's how they work.
Frequently asked questions
The definitive, binding contract governing an acquisition structured as an asset sale. It sets price and payment, lists assets bought and liabilities assumed, and contains the reps and warranties, indemnification, covenants, and closing conditions that allocate risk between buyer and seller.
Representations are statements of fact about the business; warranties are promises they're true. A typical deal has 25 to 40 seller reps covering financials, undisclosed liabilities, contracts, litigation, taxes, and clean title. If one is false, the buyer can recover, usually through indemnification.
The mechanism to recover losses if a seller rep proves false or an excluded liability surfaces after close. It comes with a survival period, caps, and baskets, and is often backed by an escrow holdback of ~10 to 15% so funds are available without chasing the seller.
Yes. It's the binding contract that decides who bears which risk, and its reps, warranties, indemnification, and disclosure schedules need a transactional attorney experienced in small-business M&A. Don't sign or rely on a generic template for the definitive agreement.
Sources
- Reps, warranties, indemnification, and escrow norms, Chuhak & Tecson, Acquisition Stars (2026).
- APA essential terms and rep counts, Howard East, Branfman Mayfield.
