Top 3 things for sellers to consider before entering into a business transfer agreement
What is a business transfer agreement?
A business transfer agreement is a contract between two or more parties (known as sellers and buyers) that sets out the commercial and legal terms that apply to the transfer of the business from the seller(s) to the buyer(s).
Find out more about business transfer agreements by reading this comprehensive guide.
3 things for sellers to consider with business transfer agreements
1. Carefully check what warranties are being given
A warranty is a contractual statement of fact and, in the case of business transfer agreements, often takes the form of assurances from the seller as to the condition of the business or assets being purchased. If the warranties are untrue, a claim can be brought by the buyer for damages. Warranties provide a buyer with a post-sale remedy if any of the warranties (which have not effectively been disclosed against) are incorrect and the value of the assets are reduced as a result.
The warranties therefore provide a mechanism for retrospective price adjustment operating as a claim for damages resulting from a breach of contract. Because of this, as a seller, it’s really important to ensure that warranties that are given are limited and only given where the seller knows that the warranty is in fact true. Otherwise, the seller is opening itself up to potential claims for breach of warranties in the future.
Typical warranties that may be given by a seller in a business transfer agreement include:
General - e.g. that the seller has the right to enter into this agreement and to sell the business;
Financial - e.g. that the seller’s accounts are accurate and there have been no material adverse changes to the seller's financial position since the last account date;
Assets - e.g. that the seller legally owns each of the transferred assets;
Contracts - e.g. that the contracts being transferred are valid and no grounds exist which could cause the contracts to be terminated;
Legal compliance - e.g. that the business has been conducted in accordance with applicable laws;
Equipment - e.g. that equipment being transferred is not subject to any interest or equity of any person or any mortgage, charge, title retention or any other security agreement or arrangement; and
Employees - e.g. that employment law has been fully complied with in respect of employees being transferred.
The seller should ensure that it only gives warranties when it knows for certain that those warranties are true and correct.
2. Know what assets and liabilities are being transferred (and not being transferred)
With a business transfer / asset sale, sometimes only certain of the business’ assets are being bought by the buyer, with other assets and liabilities remaining with the seller. Because of this, it is really important to clearly set out exactly what assets are being transferred to the buyer. This is particularly important where the seller specifically wants to retain certain assets in the business (e.g. certain intellectual property rights)- they will not want to inadvertently transfer rights to assets they wish to retain.
Failure to define the assets being transferred clearly in a business transfer agreement could lead to a dispute between the buyer and the seller in the future over what each party anticipated to be included in the sale.
3. Understand what needs to be done by the seller on completion of the transfer
As well as entering into a business transfer agreement, other action is likely to be required of the seller on completion of the business transfer. This will include:
if the seller is a company, getting all necessary internal approvals e.g. from the company’s board via board minutes;
providing assignments and transfers for any assets being transferred that are not capable of physical delivery
providing All documents vesting title to the assets being transferred;
providing all records relevant to the assets being transferred; and
placing the buyer in effective control of the business and the transferred assets on completion.
How can Docue help? Use our business transfer agreement template!
You can use Docue’s business transfer contract template to document the sale of your business. The business transfer agreement template has been drafted by lawyers and can easily be tailored to suit your business transaction by simply answering a series of questions. Lawyer-drafted guidance notes are there to help you answer the questions, and you can send the business transfer agreement out for signature electronically using Docue’s e-Signature function once it's complete.
Sign up now to use Docue’s business transfer agreement template.
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