How Disclosure Schedules Provide Insurance in an Asset Purchase Agreement

January 21, 2016

Disclosure schedules are attachments (addendums) added to the Asset Purchase Agreement (APA) by the seller to memorialize all of the little things that were reviewed, discussed, and generally agreed upon verbally. By putting these in writing, it can stop future disputes on one or more of these items. Otherwise, what starts as a simple disagreement between you and the seller could result in a lawsuit and/or cause the buyer to withhold payments on the seller note.

As an example, the buyer is thrilled because your largest customer has embraced the sale, and the customer has confirmed your verbal statements that there is a multi-year sales contract in place. What you, the seller didn’t even know, and what your customer did not tell the buyer, is that the sales contract can be cancelled on 60-day notice without cause. If you had inserted that sales contract as a disclosure schedule to the asset purchase agreement, you would have shifted the responsibility of knowing all there is to know about the sales agreement from you to your buyer. So, if the large customer decides to switch the work historically done by your former company to a new vendor, the buyer will correctly be upset. When he learns that this move is kosher, the buyer cannot accuse you of withholding information (which could result in the buyer looking to you for compensation for lost business) as he, the buyer, had perfect information available to him before closing under a disclosure schedule typically entitled “Contracts with Major Customers.”

You get the picture. You can protect yourself from similar scenarios from potential lawsuits, issues with MIOSHA, environmental matters, pending price increases from vendors; potential union organizing activity, pending retirement of key employees, etc. by disclosing what you know (or ideally what you have in writing) on such subjects as appropriate for APA disclosure schedules.

The good news about schedules is that there is little to no cost – just your attorney’s review to make sure everything is properly disclosed. The bad news is that the preparation of these schedules is often both tedious and time consuming. However, given the potential cost to you of not taking disclosure schedules seriously, schedule preparation will be the best boring days of your business career.

Contributed by Michael Greengard, Praxis Business Brokers.

Through the Michigan Chamber’s partnership with Praxis, we can guide you through a step-by-step process of the complexities, all while maintaining complete confidentiality. To learn more about selling your business, please contact Lindsay Fulton at lfulton@michamber.com or 517-371-7691.