M&A Attorney Guide • By Alex Lubyansky

Asset Acquisition LOI:
Key Terms and Language

Asset deals require more precise LOI drafting than stock deals. Every asset, every liability, and every tax allocation must be addressed before you sign. Here is what the language needs to say.

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Core Sections Sample Language Common Pitfalls FAQ
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What Is an Asset Acquisition LOI?

An asset acquisition letter of intent is a preliminary agreement that defines the terms under which a buyer will purchase specific business assets rather than the ownership shares of the selling entity. Unlike a stock purchase, where the entity transfers as a whole, an asset deal requires the LOI to enumerate which assets are included, which liabilities the buyer assumes, and how the purchase price will be allocated among asset classes under IRC Section 1060. The asset LOI is more complex to draft than a stock LOI, and the gaps in it are more costly to discover after signing.

Why LOI Language Matters More in Asset Deals

In a stock purchase, the buyer acquires the entity as a defined legal unit. The LOI's job is primarily to set price and the indemnification framework. In an asset acquisition, the LOI must do something harder: define a deal that does not yet exist as a legal unit. The buyer is assembling a custom package of assets and obligations. Nothing transfers by default. Everything must be named.

This creates two risks. First, if the asset schedule is vague, sellers and their counsel will interpret ambiguity against the buyer during purchase agreement drafting. Second, if the liability assumption language is broad rather than specific, a buyer may find themselves responsible for obligations they never intended to take. Both risks are addressed in the LOI, not after it.

The general LOI framework applies to both deal types. What differs in an asset acquisition is the level of specificity required on four points: the asset schedule, the liability assumption clause, the purchase price allocation framework, and the working capital peg. Each is addressed below.

Section by Section

Core Asset Acquisition LOI Provisions

Each of these sections requires specific drafting in an asset deal. Stock purchase LOIs address these differently or not at all.

1

Identifying Acquired Assets: Enumeration vs. General Categories

The purchased assets clause is the foundation of every asset deal LOI. There are two approaches: enumerate specific assets by category, or use a general "substantially all assets" construct with a carve-out list. For most small to mid-market transactions, specific enumeration is safer for the buyer.

Standard Categories to Include:

  • - Tangible personal property (equipment, fixtures, inventory)
  • - Intellectual property (trademarks, trade names, patents, software)
  • - Assignable contracts and customer agreements
  • - Customer lists, records, and databases
  • - Permits and licenses (to the extent transferable)
  • - Goodwill and going-concern value
  • - Telephone numbers, domain names, social accounts

Attorney Note:

Do not rely on "all assets used in the business" as your only description. If a specific category matters to the deal thesis, name it. Goodwill language is frequently litigated when not explicitly included. The same applies to domain names, social media accounts, and phone numbers, which sellers sometimes retain without objection until the purchase agreement is drafted.

2

Excluded Assets: Cash, Receivables, and Seller-Retained Property

What the seller keeps is as important as what the buyer receives. The excluded assets list prevents post-signing disputes about items the parties assumed were understood but never agreed to in writing.

Typical Excluded Assets:

  • - Cash and cash equivalents
  • - Accounts receivable (if pre-closing AR stays with seller)
  • - Corporate records, minute books, stock ledgers
  • - Tax refunds for periods ending before closing
  • - Insurance policies and proceeds
  • - Personal assets of principals not used in the business
  • - Contracts not listed on the assigned contracts schedule

Watch Point:

Accounts receivable is frequently contested. Buyer counsel typically wants AR included (the business needs cash to operate after closing). Seller counsel typically wants AR excluded (the seller earned it). This question must be answered in the LOI, not left open. Silence on AR almost always produces a dispute in purchase agreement drafting.

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Assumed Liabilities and Excluded Liabilities

HIGHEST RISK

The assumed liabilities clause is where most asset acquisition disputes originate. In an asset deal, the buyer assumes only what is explicitly agreed. Vague language like "buyer assumes ordinary course liabilities" is a blank check. The LOI must state exactly what transfers and make clear that everything else remains with the seller.

Buyer Typically Assumes:

  • - Obligations under assigned contracts arising after closing
  • - Trade accounts payable listed on a closing schedule
  • - Deferred revenue tied to customer contracts being assumed

Buyer Explicitly Does Not Assume:

  • - Pre-closing liabilities of any kind
  • - Tax obligations (federal, state, local)
  • - Litigation, claims, and threatened claims
  • - Environmental liabilities
  • - Employee liabilities (accrued PTO, unpaid wages, benefits)
  • - Seller debt not specifically listed

Attorney Note:

The excluded liabilities section should include a catch-all: "Seller shall retain all liabilities of the Business not expressly listed as Assumed Liabilities, whether known or unknown, contingent or fixed, arising from events occurring before or after Closing." This language protects the buyer against successor liability theories under state law, which can impose liability on asset purchasers even when they did not expressly agree to assume the obligation.

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Purchase Price Allocation Language (IRC Section 1060)

TAX IMPLICATIONS

The IRS requires both parties to allocate the purchase price among acquired asset classes under IRC Section 1060 and to file consistent Forms 8594. Because buyer and seller often have opposing interests in how that allocation is structured, establishing the framework in the LOI is essential. Leaving it unaddressed creates a high-friction negotiating point late in the deal.

The IRC Section 1060 Class System:

  • Class I: Cash, demand deposits (ordinary income)
  • Class II: Securities (ordinary income)
  • Class III: Accounts receivable (ordinary income)
  • Class IV: Inventory (ordinary income)
  • Class V: Equipment, tangibles (depreciation recapture)
  • Class VI: Intangibles (15-year amortization)
  • Class VII: Goodwill (15-year amortization)

Buyer prefers higher allocation to Class V-VII (depreciable/amortizable). Seller prefers higher allocation to Class VII (capital gains on goodwill).

Attorney Note:

The LOI does not need to specify dollar allocations by class. It should commit the parties to negotiate allocation in good faith before closing and to file consistent Forms 8594. If a preliminary allocation framework can be agreed at the LOI stage, include it. This saves negotiating time and prevents the allocation from becoming a deal-breaker six weeks before closing when both parties have already spent on due diligence.

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Purchase Price Adjustments: Working Capital, Debt, and Cash

Asset acquisition pricing is typically structured on a cash-free, debt-free basis with a working capital adjustment. The LOI must define the working capital target, the calculation methodology, and the adjustment mechanism, or the seller may drain receivables and accumulate payables in the period between signing and closing.

Key Terms to Address:

  • Working capital target: Normalized current assets minus current liabilities
  • Calculation method: GAAP, consistent with historical practice
  • Adjustment mechanism: Dollar-for-dollar above or below target
  • Timing: Estimated at closing, true-up 60-90 days post-close
  • Debt payoff: Seller debt to be retired at or before closing
  • Cash treatment: Cash excluded from purchase (seller retains)

Attorney Note:

Working capital disputes are the most common post-closing litigation in asset acquisitions. Establishing the target and methodology in the LOI does not prevent all disputes, but it substantially limits the scope of disagreement. A seller who agrees to a working capital peg in the LOI has significantly less leverage to argue the peg was never part of the deal when the purchase agreement is being drafted.

6

Representations and Warranties Scope at LOI Stage

Asset deal LOIs do not typically contain full rep and warranty provisions. However, they should establish the framework: what the seller will represent about the condition of acquired assets, the absence of undisclosed liabilities, and the status of key contracts. This signals expectations and prevents later disputes about what was reasonably assumed.

Typical Asset Acquisition Representations (to be detailed in APA):

  • - Title to acquired assets (free and clear)
  • - Condition of tangible property
  • - No undisclosed liens or encumbrances
  • - Assignability of contracts and permits
  • - Intellectual property ownership and validity
  • - No pending or threatened litigation
  • - Tax compliance through closing
  • - Employee and benefits matters
7

Covenants Between Signing and Closing

The period between LOI execution and asset purchase agreement closing can run 60-180 days. During that time, the seller must operate the business in the ordinary course, not sell or encumber acquired assets, not modify key contracts without buyer consent, and not solicit competing offers. These interim covenants are often omitted from LOIs and later disputed.

Key Interim Operating Covenants:

  • - Operate in the ordinary course of business
  • - Maintain acquired assets in current condition
  • - Not sell or transfer any acquired assets
  • - Not modify, extend, or terminate assigned contracts
  • - Notify buyer of material adverse changes
  • - Not hire or terminate key employees without consent
8

Transition Services and Employment Matters

Because asset deals involve re-employment of workers (employees do not automatically transfer), the LOI should address which employees the buyer intends to offer positions, whether the seller will provide a transition assistance period, and how employee-related liabilities (accrued PTO, WARN Act obligations, benefit plan liabilities) will be allocated.

Employment Matters to Address in the LOI:

  • - Buyer's right (not obligation) to offer employment to seller's employees
  • - Seller's obligation to terminate employees who are not offered positions
  • - Allocation of pre-closing accrued PTO, wages, and benefits
  • - Transition services period if seller assistance is needed post-closing
  • - Non-solicitation of employees by seller post-closing

Attorney-Drafted Examples

Sample Asset Acquisition LOI Language

The following clauses are representative of language used in asset acquisition letters of intent. They are starting points, not finished provisions. Every transaction requires modification based on deal-specific facts.

Asset Identification Clause

Sample Language

PURCHASED ASSETS

The assets to be acquired by Buyer (the "Purchased Assets") shall include all assets of Seller used in connection with the operation of [Business Name] (the "Business"), including without limitation: (i) all tangible personal property, including equipment, furniture, fixtures, vehicles, and inventory; (ii) all intellectual property, including trademarks, trade names, service marks, trade dress, patents, copyrights, domain names, and social media accounts; (iii) all contracts and agreements set forth on Schedule A attached hereto (the "Assigned Contracts"); (iv) all customer and vendor lists, records, and databases; (v) all permits, licenses, and governmental approvals, to the extent transferable; and (vi) all goodwill and going-concern value of the Business. For the avoidance of doubt, the Purchased Assets shall exclude the Excluded Assets set forth below.

Attorney Commentary: The "including without limitation" construct ensures that an asset category not specifically named does not fall outside the purchase simply because the drafter forgot to list it. The "for the avoidance of doubt" reference to the excluded assets schedule is standard practice to eliminate any ambiguity about whether an asset falls on the included or excluded side of the line.

Assumed Liabilities Clause

Sample Language

ASSUMED LIABILITIES / EXCLUDED LIABILITIES

Buyer shall assume only the following liabilities of Seller (the "Assumed Liabilities"): (i) obligations arising under the Assigned Contracts on or after the Closing Date; and (ii) trade accounts payable of the Business set forth on Schedule B as of the Closing Date, not to exceed $[_____] in the aggregate.

Seller shall retain, and Buyer shall not assume, any liability not expressly identified as an Assumed Liability, including without limitation: (a) any liability arising from or relating to events occurring prior to the Closing Date; (b) any federal, state, or local tax liability; (c) any liability relating to litigation, claims, demands, or governmental investigations pending or threatened as of the Closing Date; (d) any environmental liability; (e) any liability relating to employees of the Business for periods prior to the Closing Date, including accrued wages, vacation, sick pay, and benefits; (f) any indebtedness of Seller; and (g) any liability not reflected in the Assumed Liabilities schedule, whether known or unknown, contingent or fixed.

Attorney Commentary: Note the aggregate cap on assumed trade payables. Without this, a seller can increase payables between LOI signing and closing, effectively increasing the buyer's economic cost. The catch-all in the excluded liabilities clause is deliberate. Successor liability doctrines in many states allow creditors to pursue asset purchasers even without an express assumption. This language gives the buyer a clear contractual defense.

Purchase Price Allocation Clause

Sample Language

PURCHASE PRICE ALLOCATION

The Purchase Price shall be allocated among the Purchased Assets in accordance with Section 1060 of the Internal Revenue Code and the Treasury Regulations thereunder. Buyer and Seller shall negotiate such allocation in good faith prior to Closing and shall prepare and file all required tax returns and IRS Forms 8594 (Asset Acquisition Statement) in a manner consistent with the agreed allocation. Neither party shall take any tax position inconsistent with the agreed allocation without the prior written consent of the other party.

Attorney Commentary: The consistency obligation in the final sentence is critical. If the parties agree on a $400,000 allocation to equipment and then one party files Form 8594 with a different number, the IRS may treat the inconsistency as an underreporting event. The phrase "prior written consent" creates a meaningful barrier to unilateral deviation. Tax counsel should be involved in reviewing the allocation before the APA is signed.

Purchase Price Adjustment Clause

Sample Language

PURCHASE PRICE ADJUSTMENT

The Purchase Price is based on the Business operating with Working Capital equal to $[___] (the "Working Capital Target"). "Working Capital" means current assets (excluding cash and cash equivalents) minus current liabilities (excluding debt to be retired at Closing), calculated in accordance with GAAP applied consistently with Seller's historical practices. At Closing, the parties shall prepare a good-faith estimate of Working Capital as of the Closing Date. If actual Working Capital exceeds the Working Capital Target, the Purchase Price shall be increased dollar-for-dollar by the excess. If actual Working Capital is less than the Working Capital Target, the Purchase Price shall be decreased dollar-for-dollar by the shortfall. A final Working Capital calculation shall be prepared within sixty (60) days following Closing, with any resulting adjustment paid within ten (10) business days of determination.

Attorney Commentary: The exclusion of cash from the working capital calculation reflects the cash-free, debt-free structure of the deal. The "consistent with historical practices" language is important. If the seller has used an aggressive accounting method for inventory valuation, applying a different method at closing can produce an unexpected adjustment. Setting the baseline methodology in the LOI eliminates this dispute.

Non-Compete and Non-Solicit Clause

Sample Language

NON-COMPETITION AND NON-SOLICITATION

As a condition of the Transaction, Seller and its principals shall enter into a Non-Competition and Non-Solicitation Agreement for a term of [3-5] years following Closing, on terms to be set forth in the definitive Asset Purchase Agreement. Such agreement shall restrict Seller and its principals from: (i) engaging in any business that competes with the Business within [geographic area]; (ii) soliciting or servicing customers or vendors of the Business; and (iii) soliciting, recruiting, or hiring employees of the Business or Buyer following Closing. The parties acknowledge that reasonable restrictions of this nature are an integral component of the goodwill being acquired and are necessary to protect the value of the Transaction.

Attorney Commentary: Non-competes must be reasonable in scope, duration, and geography to be enforceable. State law varies significantly. California's courts are generally hostile to non-competes. Michigan and most other states will enforce them if reasonable. The LOI clause should establish the framework, not the precise language. That precision belongs in the APA. However, if the seller balks at any non-compete in the LOI, that signals a problem worth addressing before due diligence spending begins.

Asset acquisition LOI drafting requires precision at every clause.

Every asset acquisition has deal-specific variables: which assets are critical, which liabilities are contested, and how the allocation affects both parties' tax positions. Alex Lubyansky reviews the LOI before it shapes the entire deal.

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What Goes Wrong

Common Asset Acquisition LOI Pitfalls

These are the recurring errors in asset acquisition LOIs that cause deal disputes, price reductions, and failed closings.

1

Vague Asset Descriptions

Using "all assets of the business" without specificity invites argument about what is and is not included. When a seller's attorney receives a vague list, they narrow it. When a buyer's attorney receives a vague list, they interpret it broadly. These interpretations collide in purchase agreement drafting. The resolution is usually expensive. Enumerate the categories that matter to your deal thesis explicitly.

2

Silence on Liability Assumption

An LOI that defines purchased assets but says nothing about liabilities has left the most consequential issue unresolved. In the absence of an explicit assumed liabilities clause, courts in some jurisdictions will apply successor liability theories to impose obligations on the buyer. State your assumption scope explicitly, list what the buyer will and will not take, and include the catch-all exclusion language shown in the sample clauses above.

3

No Mention of Allocation

Omitting the Section 1060 allocation framework from the LOI allows the seller to take a favorable tax position in purchase agreement negotiations without having committed to anything in writing. The buyer then faces a choice: accept an allocation that favors the seller, or risk deal disruption close to closing. Establishing the good-faith negotiation obligation and the consistency requirement in the LOI costs nothing at the term sheet stage and prevents a difficult late-deal negotiation.

4

Missing Working Capital Target

Stating a purchase price without a working capital peg allows a seller to legally reduce the operational capacity of the business before closing. The seller draws down receivables, lets payables accumulate, and delivers a business that needs immediate cash infusion. If no working capital target was agreed, the buyer has no contractual remedy. This is the most common post-closing dispute in asset acquisitions and it is preventable with a single clause in the LOI.

5

Omitting the Non-Compete Framework

A buyer who closes an asset acquisition without a non-compete has purchased a business the seller can immediately compete against. In many states, goodwill purchased in an asset deal is legally protected by an implied non-compete only if the seller signed one. Do not rely on implied protections. State the non-compete parameters in the LOI. If the seller objects to any non-compete at the LOI stage, you have learned something important before spending on due diligence.

When to Engage M&A Counsel on Asset Deal LOI Drafting

The answer is before the LOI is submitted, not after. Once an LOI is signed, the buyer has given the seller a framework to work with. Any deviation from that framework during purchase agreement negotiations requires seller cooperation. Sellers rarely cooperate on points that cost them money.

The M&A attorney's role at the LOI stage is not ceremonial. It is structural. The attorney identifies the clauses that will become points of contention, drafts language that protects the client's position, and flags seller-proposed language that creates unintended exposure.

Due diligence follows the LOI. See the full due diligence services overview for what that process covers. For transaction structure background, the asset purchase vs. stock purchase comparison covers the fundamental decision. The asset purchase agreement guide explains what follows the LOI once structure is agreed.

The LOI is also the right time to discuss tax counsel involvement on the Section 1060 allocation. The allocation decision has consequences that extend well beyond closing. Getting the right professionals involved at the LOI stage avoids expensive corrections later.

Common Questions

Frequently Asked Questions

What makes an asset acquisition LOI different from a stock purchase LOI?

An asset acquisition LOI must specifically enumerate which assets the buyer is purchasing and which liabilities the buyer will assume. In a stock purchase, the buyer acquires the entire entity by default. In an asset deal, nothing transfers unless the LOI explicitly includes it. This means asset LOIs require more detailed drafting around purchased assets, excluded assets, assumed liabilities, and purchase price allocation under IRC Section 1060. See the full comparison in our asset vs. stock purchase LOI guide.

Does an asset acquisition LOI need to address purchase price allocation?

Yes. In asset acquisitions, the IRS requires both parties to allocate the purchase price among the acquired assets using the framework in IRC Section 1060 and to file consistent Forms 8594. Because buyer and seller often have conflicting tax interests in how that allocation is structured, addressing it in the LOI prevents disputes during purchase agreement drafting. The LOI should state that the parties will negotiate allocation in good faith and file consistent Forms 8594.

What assets are typically excluded in an asset acquisition LOI?

Standard exclusions include cash and cash equivalents, pre-closing accounts receivable (if the parties agree), seller's corporate records and minute books, tax refunds for periods ending before closing, and any personal assets of the seller not used in the business. The excluded assets list should be negotiated and defined clearly in the LOI to avoid disputes during purchase agreement drafting.

What liabilities should a buyer assume in an asset acquisition?

Buyers in asset acquisitions typically assume only two categories of liabilities: obligations arising under assigned contracts after the closing date, and trade accounts payable specifically listed on a closing schedule. Everything else, including pre-closing liabilities, litigation, tax obligations, environmental claims, and employee liabilities such as accrued paid time off, remains with the seller. Vague language on this point is one of the most common and costly errors in asset acquisition LOIs.

How should working capital adjustments be handled in an asset acquisition LOI?

The LOI should establish a working capital target (the normalized level of current assets minus current liabilities the business needs to operate), the calculation methodology (typically GAAP applied consistently with historical practice), the adjustment mechanism (dollar-for-dollar above or below target), and the timing of the final calculation (usually 60-90 days post-closing). Without a working capital peg, a seller can drain receivables and inflate payables before closing, leaving the buyer with a business that cannot fund its own operations.

What non-compete language should appear in an asset acquisition LOI?

The LOI should state the intended scope, duration, and geographic coverage of seller non-compete and non-solicitation obligations. Typical parameters for small to mid-market deals are 3-5 years and a geographic radius tied to the business's actual operating area or customer base. The LOI does not need to contain the full covenant text, but establishing the framework prevents negotiation breakdown at the purchase agreement stage.

When should an M&A attorney be involved in an asset acquisition LOI?

Before the LOI is signed. The asset identification schedule, liability assumption scope, purchase price allocation framework, and working capital target are all negotiating points that set the economics of the entire deal. Errors made in the LOI are difficult and expensive to correct in the purchase agreement. An M&A attorney ensures the LOI reflects the deal you actually intend to close. Request an engagement assessment to discuss your specific transaction.

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Asset Acquisition LOI Drafting and Review

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