Concept of a Business Transfer Agreement
A Business Transfer Agreement is a legally binding document between an owner of a business, the seller, and a buyer. The Business Transfer Agreement sets forth the various terms and conditions agreed upon between them. The Business Transfer Agreement should, amongst other things, record the names of seller and buyer, the date of agreement, the effective date of the agreement, the ideal closing date, a definition section, details of the purchase and sale , the sale consideration amount, any additional documents that are associated with the transaction, representations and warranties, indemnities, disclosures, decision making, costs and expenses, obligations and rights, the risk of loss, confidentiality, jurisdiction and governing law, notices, severability, waiver, modification, entire agreement, no third party rights, further assurances, headings and Wilmington Trust Company.
Essential Components of a Business Transfer Agreement
A business transfer agreement typically includes the following essential components:
Assets
The assets of the business to be transferred will vary from deal to deal, but can include real property, inventory, machinery and equipment, leases, contracts, intellectual property, licenses and certifications. The list of assets is, of course, tailored to the specific business. In addition to the assets of the business, particular attention in the agreement should be focused on the assets that will not be included in the transfer. For instance, there may be real estate the seller will continue to own or certain equipment no longer needed that the seller will remain with the seller.
Liabilities
It is standard practice to exclude some liabilities from the transfer, such as certain intercompany payables. However, a seller may agree to remain liable for certain contingent liabilities, such as pending litigation and customer or warranty claims. A buyer may be willing to absorb some of the seller’s contingent liabilities, but the parties must agree on the extent of liability.
Purchase Price
The purchase price in a business transfer agreement usually includes a base price plus adjustments for net working capital and certain taxes. Adjustments for net working capital may be calculated based on estimates or an average calculated over a three-month or six-month period. In some cases the parties will agree to a holdback or escrows to secure certain contingencies or to spread out the tax liability on installment sales.
Terms of the Transfer
While the parties are often focused on price, the terms of the transfer often require the most negotiation. There are two basic types of business transfer agreements: "asset sales" and "stock or equity sales." Each type has advantages and disadvantages from the tax and liability perspectives and may require different terms in the agreement.
In an asset sale, the seller agrees to sell and the buyer agrees to buy all or a defined set of the seller’s assets taking title to such assets free and clear of any lien or encumbrances. The seller desires to transfer the assets free and clear of all liabilities as the brand of the business is not transferred, only the assets. In such case, the seller should add that distributor in the territory does not participate in the sale.
In a stock or equity sale the buyer purchases the stock in, or the ownership rights to, the business together with all its liabilities. This method is common when buying small businesses such as sole proprietorships or partnerships. The agreement will include specific representations concerning the issued and outstanding shares and a seller or its affiliates may also make a capital contribution.
Successors and Permitted Assigns Same Business
A business transfer will have restrictions on the assigning of rights and obligations under the agreement to a successor or permitted assignee. Once the controlling owner of the business is changed, the seller is often concerned about changes to the business that may affect the brand’s reputation. On the other hand, the buyer wants to ensure it has the ability to assign rights and obligations to a successor without such restrictions.
How to Draft an Effective Business Transfer Agreement
The steps to draft an effective business transfer agreement will differ according to your jurisdiction and the nature of the business you’re buying, but there are some basic steps you’ll need to follow regardless. First, you’ll need to make sure you include all necessary details, sections and subsections. This is where it pays to have a team with expertise in business transfers at your disposal. You can consult your lawyer or corporate service provider on the specifics of your business transfer and they should be able to give you guidance on the elements of an effective agreement. Next, you’ll need to ensure all sections are aligned with legal requirements. You may need to include additional stipulations based on your jurisdiction, the nature of your business or certain stipulations from the seller. Again, your lawyer or corporate services provider should be able to give you a hand on this. If you’re unsure about whether your business transfer agreement is complete or legally compliant, it’s best to have an expert you trust take a look at it before you finalize it.
Common Clauses Found in Business Transfer Agreements
In addition to the typical disclosure of all risks, the business transfer agreement also contains clauses giving the purchaser the necessary right of recourse if an acquired business shows signs of any impairment of value. The following clauses represent common areas of concern covered by the agreement:
Non-competition: The seller agrees to refrain from establishing a new business immediately or within a defined period of time. Otherwise, he is liable to pay a penalty. A waiver of this type is common, since the seller himself would not sell a business to a competitor.
Confidentiality: The parties are obligated to treat the business secrets of the other party confidentially.
Dispute resolution: The parties agree to amicable settlement of their differences. They also appoint an arbitrator.
Tailoring the Agreement to Suit Various Business Types
The flexibility of a business transfer agreement is one of its best features. Once you’re aware of your options and how to use them, it’s easy to create a document that meets your business’s specific needs. Changes to the format of the agreement can make it more appropriate for small businesses, franchises, and partnerships.
Small Businesses
The owners of smaller businesses have different needs. They may have fewer employees, more flexible working hours, and may even have been open long enough that they know exactly which issues are most likely to come up. Owners of small businesses also often have closer relationships with their customers, and their employees may stay with the business longer. As a result, changes in ownership can be emotional for everyone involved, creating the potential for heated arguments or even lawsuits.
Disputes are more likely to be settled outside of court if everyone trusts that the other party has "good intentions," so it’s helpful to include the noncompetition clause as a guarantee that all parties have the same goal: the success of the business. You may also want to expand on the representation and warranty clauses to explicitly ensure that any assets sold with the business , such as a rental agreement or furniture, are in good working condition prior to sale.
Franchises and Partnerships
Franchise ownership usually includes set terms, such as rules about appearance (to ensure consistency across franchises), price ceilings on certain products, and up to five years of royalty payments based on revenue. The existing franchise owner must therefore ensure that these provisions continue after the business transfer, which is easy to do by updating the business transfer agreement with the details. If the sale is likely to have a negative effect on the franchise or its profits, for example, potential buyers should still be required to meet the franchise’s standards. If the buyer is already the owner of another franchise, include the restrictions on competing franchises in the business transfer agreement as well, since this will affect your bottom line.
Partnerships that use the general partnership format must spell out the roles of each owner during the sale and after. This includes the responsibilities each will take on, the authority each should have, and any restrictions. The business transfer agreement should include language asking for full disclosure of any potential problems with each owner’s area of responsibility.
Legal Considerations in a Business Transfer Agreement
Legal considerations in Business Transfer Agreement
When drafting or executing a Business Transfer Agreement certain legal issues must be considered in order to mitigate the risk involved in a Business Sale. Certain issues, in the following non-exhaustive list, must be considered:
- It will be necessary to consider if the goodwill of the business has been created through the use of any registered intellectual property. If so, how will the transfer of such assets be effected? Will there be a specific clause for the transfer of the intellectual property rights themselves? Do the moral rights of any artists need to be dealt with?
- Will there be any contractual obligations that will continue after the sale? Will there be any restraint of trade clause that needs to be considered?
- There is often a clause that provides for warranties and guarantees, however, in certain cases the seller may not want to be held responsible for all aspects of the business. For example, the seller may want to in someway limit their exposure in the case of claims that arise after the completion date. Normally this limitation of liability will need to be drafted into the Business Transfer Agreement.
- An important consideration will be any owner relations issues. Will the seller have an obligation to work during a notice period after the completion date? Will the seller be required to offer up any severance packages? Are there any provisions in the employment contracts with respect to the transfer of ownership? Will the seller be required to offer any guarantees to any creditors?
- Are there any particular sale or purchase requirements, for example, a stock on hand requirement that must be adhered to in order to affect a transfer?
These are just a few of the more common issues that arise. In addition to the above list, it is important to remember that there are certain risks that are supposed to be absorbed by the seller, but may be passed onto the buyer. In such cases, it is essential to negotiate a fairer deal and issue an indemnity protecting against such risks, as opposed to absorbing such risks.
A Sample Business Transfer Agreement Format
Several standard formats are available for business transfer agreements. The following is a sample format, which can be used as a starting point to draft an agreement.
Business Transfer Agreement This BUSINESS TRANSFER AGREEMENT made on [insert date] between first party M/s_______________ having its registered office and other office at [insert address, city and PINCODE] represented at the relevant point of time by _____ son/daughter of ___ aged ___ years, major, Indian National, hereinafter called the TRANSFEROR, Proforma-I and Second Party M/s____________________ having its registered office and other office at [insert address, city and PINCODE] represented at the relevant point of time by _____ son/daughter of ___ aged ___ years, major, Indian National, hereinafter called the TRANSFEREE, Proform-II. WHEREAS the TRANSFEROR is / are the sole / co-owner of the business of ____________ at ___________________ and WHEREAS the TRANSFEREE is engaged in a similar line of business and WHEREAS the TRANSFEROR is desirous of effecting transfer of the said business to the TRANSFEREE and the TRANSFEREE is willing to take over the business of the TRANSFEROR on the terms stipulated in this agreement. NOW THIS AGREEMENT WITNESSETH AS FOLLOWS: The TRANSFEROR HEREBY TRANSFERS and conveys to the TRANSFEREE the said business of ____________ carried on at __________________ Titled as "M/s ________". AND IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES as follows:- 1. That the expression business to be transferred under this agreement includes all and every asset, documents, records, sales registers, cash, money, effects, rights, benefits, privileges, goodwill and goodwill of the TRANSFEROR in all its trade name and style and any other things or property used in the trade of the TRANSFEROR running at the place mentioned above along with the name and goodwill of the business of any trade carried on by the TRANSFEROR at the place above referred to. 2. That the accounts value of stock were taken as on ___________and the value as agreed upon by both the parties is Rs. _______/- (Rupees ________). 3. That the amount due to the TRANSFEROR will be paid by the TRANSFEREE including the amount of the assets taken over as on ___________. 4. That all future profits and loss shall be for the benefit or responsibility respectively of the TRANSFEREE. 5. That the TRANSFEREE shall have the liberty to change the name and style of the business.
Frequently Asked Questions (FAQs) on Business Transfer Agreements
Below we have outlined some of the frequently asked questions related to a business transfer agreement.
1. What if the employee refuses to sign the Employment Transfer Agreement or the Purchase and Sale Agreement?
As per the Law on Entrepreneurs, an employee’s consent is not required for the transfer of his/her employment contract in the event of a business transfer. Any provision in an individual agreement stipulating otherwise is deemed to be ineffective. The purchaser of the business must inform the employees of the terms and conditions of the transfer to a new employer; however, the employees’ consent is not required and they maintain all the rights deriving from their contracts of employment and from applicable collective bargaining agreements.
2. What is the status of the business transfer agreement?
The business transfer agreement is governed by the provisions of book 4 of the Code of Obligations of Switzerland.
3 . What happens with the Employment Transfer Agreement if the employee resigns in the meantime?
As the Employment Transfer Agreement is entered into as a consequence of the business transfer, it contains the condition precedent that the employment must exist at the time of the execution of the Employment Transfer Agreement in order to be valid. In the event that the employee resigns his/her employment before the execution of the Employment Transfer Agreement, the Employment Transfer Agreement shall be null and void.
4. Is a business transfer agreement subject to transfer tax?
Depending on the type of the assets of the transferring entity, a tax on the transfer of assets may apply. For example, any transfers of real estate are subject to transfer tax. This tax is paid by the purchaser to the issuer of the certificate of transfer of the real estate. The transfer tax rate varies amongst the Swiss cantons. In general, the rate in these cantons ranges between 0.6% and 4%. The transfer tax is imposed on the agreed price, but the applicable tax authority will assess the value of the transferred real estate in accordance with the local market rate and will impose the tax on the higher price of the governmental price and the price of the purchase agreement.