An Asset Purchase Agreement (APA) is the most commonly used document in commercial transactions, such as deals involving purchases of commodities, shares, businesses and real estate. These types of contracts are vital to business activity.

To execute any deal successfully you need the protection of a well drafted APA, but often buyers or sellers fail to take even the basic steps required to protect their own interests.

Below are the top 10 “red flag errors” we see when buyers or sellers consult us after a deal has been completed and they are looking to salvage their money or assets, or otherwise engage in “damage control.”

1. Doing the Deal with the Wrong Person

The best drafted APA in the world is of no use to you if you sign it with a fraudster or an incompetent. This seems so obvious, but tons of people do deals without doing critical due diligence, including:

review of books and records for the last 5 years
interviewing customers and partners
checking if the company is current on taxes
checking if there is any litigation against the Seller or the business
making sure you are clear about debt – both secured and unsecured debt

It comes down to really understanding who the Seller is. Sellers can also be led down the rabbit hole with a buyer who is fishing for a deal but not sincere. It is crucial for sellers to get a proof of funds right away and references regarding his/her ability to execute on the deal.

2. Essential Parties Are Not Part of the APA

Often buyers will sign an APA with Company A, when in reality Company B (or a Shareholder in Company A), is the actual owner of all or part of the assets being purchased. On the seller side, sellers often engage in a contract under which Company C is buyer and makes significant final commitments to the seller, but seller does not realize until it is too late that Company C is merely a shell company with no assets to meet the commitments. It is crucial to do full due diligence and make sure people are who they say they are. I personally think you should always meet in person as buyer and seller and look each other in the eye before finalizing a transaction.

3. Failure to Identify and Address Essential Pre-Conditions to the Deal

Conditions precedent are conditions and events which must be resolved before a transaction detailed in an APA can be completed. Any buyer or seller has to identify all these preconditions and make sure they are all properly addressed in the APA. Important conditions to include are:

clearance of the seller’s debts
third party consents
transferring key employees
banking approvals
clearances and approvals from the appropriate authorities

You can as the Buyer put money in escrow for the sale just like when you are buying a house, and that money stays in escrow until all the preconditions to the deal are met.

4. Failure to Specify a “Long Stop Date”

Commonly, certain conditions have to be met before the deal can close. What if the time for satisfying conditions or obtaining approvals blows out from weeks to months? In this case buyers and sellers need to have a “Long Stop Date” in their APA, so they can bail out of the APA if the delay becomes untenable for them. If essential preconditions are not met by this long stop date, one or both parties can walk away from the deal. Again, this can be an Escrow condition and the Escrow agreement can address all these pre-conditions and a deadline.

5. Failure to Agree Necessary Financial Adjustments

In some deals, buyers seek to protect themselves by including a post-acquisition price adjustment. Upon completion of the transaction, the buyer’s accountants finalize the accounts and determine the net assets of the company to evaluate whether the price paid at completion was greater or lower than agreed. If the price was greater than the value, the buyer will be granted a reconciliation payment. An alternative to the post completion price adjustment is the “locked-box” approach in which the seller makes a detailed and specific commitment as to the value of the business’s net assets at closing. If the business suffers major losses or the sellers strip out dividends, any buyer without these safeguards will be financially exposed. Frequently, Buyers and Sellers do a simple APA and don’t address that the value of the assets changed. Buyers should really think about this issue and include it in their APA.

6. Failure to be Specific about Closing Requirements

An APA should clearly identify all actions to be taken and all the documents to be provided at closing. Examples include discharge of banking facilities, handover of customer and financial records, change of bank and regulatory signatories, original documents, and obtaining regulatory approvals. This also includes the rules under any escrow agreements. Communication and clarity are is key.

7. Failure to Protect Against Competition from the Seller

Any buyer should consider whether it is appropriate that the APA contain contractual terms restricting the seller from competing with or soliciting customers and suppliers, and against poaching employees of the business for a specified period of time after completion. All APA agreements should include confidentiality agreements, non-solicitation agreements, non-compete agreements and IP protection overall. Better to be safe than sorry.

8. Failure to Change Signatories

Often, buyers overlook the need to change the signatories to essential banking and business accounts. Third parties must be notified in a timely fashion of the new owners and accept the signatories. This also includes the transition of all accounts for websites, marketing, social media, bank accounts, memberships, subscriptions, databases and cloud services. It is ideal for the APA to include provisions that require the Seller to assist the Buyer with transition items for a period of time, say 3 to 6 months depending on the complexity of the transaction and the business operations.

9. No Simple and Effective Dispute Resolution

In the run up to closing, arguments over money and adjustment are common. The APA can ease these problems by providing for independent experts to conduct valuations and provide their expert advice on issues in dispute and arbitrate if necessary. Often, I make sure the Parties agree on valuation and method to get to valuation prior to negotiating the actual APA. This solves a world of disputes at closing.

10. Skimping on Lawyers’ Fees

This is definitely my personal rant. I used to spend a ton of time undoing the messes caused by clients using online inadequate forms for their APAs. They needed me to fix the mess after the transaction closed. This is because often parties download “ready-made” contracts from the internet, adapt a form from the last deal or try to draft the contract themselves. Ensure you have a specialist lawyer review the APA. Lawyers’ fees for reviewing APAs are often a tiny fraction of lawyers’ fees for litigation, or catastrophic financial losses from a deal gone bad or a deal which should never have been done. As much as we lawyers want to earn a living fixing your messes, we would much rather earn a living by proactively avoiding messes as the general counsel for your new business.

Written by Lara Lavi

This article was originally published on UpCounsel.