What Is a Business Transfer Agreement?
In the complex landscape of business ownership, the transfer of assets or equity can be a critical point in a company’s lifecycle. Enter the business transfer agreement. This crucial document formalizes the personal and legal understanding between the parties involved, outlining exactly what is being transferred, under what conditions, and to whom. Whether the transaction involves the sale of a company, a division merger, the conveying of a brand, intellectual property rights, or other assets, the transfer agreement serves to meticulously detail the scope of the deal.
The agreement also protects the interests of both parties involved in the transfer, providing a layer of security in the event of a dispute down the road. For instance, the agreement may include warranties representing the seller’s claim of ownership and ability to sell the property. Additionally , it may incorporate a non-compete clause to protect the buyer from competition from the seller for a specified period of time. Other elements may include indemnification provisions, representations and covenants, the extent of confidentiality, indemnification provisions, and others necessary for the individual parties.
When it comes to the legality and enforceability of a business transfer agreement, both parties must agree to the terms with mutual consent. The agreement should also be in writing to warrant validity. Certain transactions may carry additional requirements, like officer signatures or registration with the state where the company is incorporated. Failure to address these requirements and appropriately document them may cause significant delay or conflict upon a transfer’s execution.
Important Elements of a Business Transfer Agreement Template
A properly executed business transfer agreement contains key components that detail the terms and conditions for the transfer of a business. Parties Involved: The parties to the business transfer agreement are the parties transferring the business (the transferors) and the parties receiving the business (the transferees). The parties can be either individuals, corporations or both. Either way, the parties entering into a business transfer agreement must have the legal authority to effectuate the transfer. Once identifying the parties and their authority, the business transfer agreement should contain the date and location of the transfer, the effective date and the signatories for each party. The assets that will be transferred to the other party should also be itemized in the agreement, including the name of the asset, its general condition, the quantity and any serial numbers that are assigned to the assets should be noted. Liabilities, if any, should also be itemized in the transfer agreement, including its amount, dates and any other variables that may be specific to the debts. There are several parts to a business transfer agreement that will be unique to the specific business and the assets being transferred. In addition to the common elements, a business transfer agreement may also include the following: Each component of the business transfer agreement is designed to protect both parties to the agreement in the event that a dispute arises in the future regarding the business and any assets that were transferred between the parties. Drafting an agreement that is fair to both parties will also help to increase the likelihood that the agreement will be honored and adhered to. Choosing the right type of agreement for the transfer will also avoid any unnecessary expenses that might arise in the future.
Transfer as Assets vs. Shares
Business transfer agreements typically require parties to transfer either the stock or the assets of the business. Whether the transfer involves stock or assets will affect how the parties should negotiate the terms of their agreement. An asset purchase involves the sale and purchase of the assets of a business by the buyer. An asset purchase is generally the preferred form of transfer. In an asset purchase, the transferee receives the assets that it wants to operate its business and may acquire the assets free of existing liabilities, including tax liabilities, potential litigation claims, environmental liabilities and labor disputes. Although it is common to acquire a business by transfer of stock, the purchaser may take on any of the seller’s existing material liabilities.
An asset transfer agreement requires a seller to list the assets that are being transferred. The assets transferred will often include tangible assets such as real estate, inventory, equipment, furnishings and intangible assets such as intellectual property and goodwill. A stock transfer involves transferring the shares the seller holds in a corporation that the seller owns. A stock purchase agreement will, in essence, be a transfer of the ownership of the corporation rather than its assets. In an asset transfer, only the assets listed in the agreement will be transferred. The liability for undocumented matters will not pass to the transferee. In a stock transfer, the stockholder will continue to be liable for any liability that arose before the transfer. It is important that the asset transfer agreement be specific regarding what assets will be transferred so there can be no subsequent claims that other assets were transferred.
Legal Issues Impacting Business Transfers
In drafting the transfer agreement, you’ll want to be certain that the transfer complies with all relevant statutory and legal requirements. The significance of these vary depending on the structure of the business. For example, a share transfer should, so far as possible, be structured as a sale of the shares in the company. This will usually avoid the need for third-party consents and allow the seller and buyer to get on with their business. It is worth checking (during due diligence) whether any consents are required either before or after the transfer. Consent provisions could be triggered in a number of ways, including contractual restrictions such as service agreements, development agreements, charge over intellectual property, funding agreements, intra-company agreements and older legal documents specific to the company. This is particularly important if the seller still has an ongoing role in the business after the sale.
In the case of a transfer of business assets, the seller will need to notify clients and suppliers about the name change, if any, and the change in entity making the sales and purchases. There may be contracts with the seller’s name and all invoice details will need to be changed. The seller will typically also want to make sure that client consent is not required to continue to deal with the purchaser.
Sometimes it is worth getting client and supplier consent before the transfer so that the obligations flow to the purchaser at the date of transfer rather than only for the remaining term. If consent is required, an assignment agreement should be put in place but checking is advisable. Agreements rarely include disclosure obligations when there is a transfer between two companies that are not competitors, because the law does not favor restraining competition. However, the Competition Act has been used sporadically in the past, and clearance requirements can apply to businesses in those sectors. In a sale of shares, the buyer will often include a counter-indemnity from the sellers for any liability caused by Competition Act violations or breach of other laws in the period prior to the business transfer, so that the buyer does not get left with the bill for violations that occurred before the transfer. That counter-indemnity should be carefully defined.
With regard to the sale of shares, the target will need to provide its annual filings and audited financials. The parties will spend considerable time during due diligence and in structuring the sale agreement on exchange of financial information relating to the sale of business assets or the sale of shares so that they are sufficient to permit the purchaser to value the business and assess its prospects and risks.
How to Tailor Your Business Transfer Agreement Template
Business transfer agreements templates are a great starting point for any business when they need to create a new agreement. A template provides a basic structure and a list of commonly needed provisions. However, each agreement needs to be customized to fit the needs of the individual businesses involved in the transfer.
When customizing a business transfer agreement, the first step is to identify the purpose of the transfer. A transfer can involve the sale of all or part of a business, the transfer of ownership interest, the assignment of assets, the sale of real property and many other purposes. Different types of transfers require different provisions in the agreement, and certain provisions will be more important than others.
For instance, if the transfer involved the sale of real estate, a survey may be critical to include in the agreement. If the transfer involved the assignment of contracts, there may need to be provisions for the response of third parties to the assignment. If the transfer involves the ownership interest, the agreement will need to contain information regarding the valuation of the business as well as numerous representations and warranties. The most important step in customizing a business transfer agreement is understanding the purpose of the transaction and making sure that every important issue is addressed.
Another important question that must be addressed is the timetable for completion of the business transfer. Where the transaction is complicated, including many different segments , it may be necessary to include timelines for each segment of the transfer in the agreement. If the transfer will take place over time, either because of financing or because third-party consents must be obtained, there should be a clear timetable for completion of each step.
Whether the transfer is complete on signing the agreement or if the agreement is just one of several steps in a long process, a timeline can help make parties accountable for their actions and ensure that the transaction is completed in a timely way without parties losing interest or getting distracted.
The payments involved in a business transfer are also critical to include in a business transfer agreement. When the purpose of the transfer is to provide a sale price for the purchaser’s interest in the business, the price and the terms of payment should be clearly delineated. If the payments are to be made in installments, there should be language in the purchase that covers what happens the purchaser defaults on any installment or if the business does not live up to its expectations.
The parties involved in a business transfer should also consider whether to include an audit or review right in the agreement. An audit or review right may be critical when the transfer involves the valuation of a business. Where one party is contributing an asset to the business, it may be important to the contributing party to have third party review of the valuation to protect its interests. In short, the parties need to consider what is at stake for each of them and customize the transfer agreement to ensure that each party’s interests are protected.
Pitfalls to Avoid
When it comes to business transfer agreement templates, a few pitfalls can become quite costly if not avoided. Knowing how to properly customize a template can make the difference between a lucrative business transaction in the near future and a headache-inducing legal dispute in the months and years ahead.
One of the common mistakes buyers make when downloading or purchasing a business transfer agreement template is thinking it will be a "fire and forget" document. A business transfer agreement that has terms so specific and unique to the deal cannot be a generic document. Instead of looking for a one-size-fits-all agreement to purchase and execute, the buyer must instead secure an agreement template that is more general, then customize that template to suit the needs of the transaction.
This is where many business buyers go wrong. By using a business transfer agreement template that lacks generality, the terms of the document may not allow for the insertion of specific or unique details of the transaction. Customization then becomes impossible, which limits the buyer’s negotiating power and may impact the overall success of the sale.
Another mistake many buyers make is thinking that they don’t need to engage legal counsel to review or draft a business transfer agreement. While this is certainly a fine line to walk, especially for someone that may have a limited budget, there are numerous reasons to invest the funds into having a professional handle your business transfer agreement documents. Implementing a template without a thorough review from a legal expert could lead to problems down the road.
Buyers should avoid the temptation of buying a template without ensuring it has the right general terms to suit the deal. Likewise, when thinking about downloading and executing a purchased business transfer agreement template without some modifications, the buyer needs to avoid that temptation as well, and consult with a legal expert to ensure the transaction is documented appropriately and will be enforced.
Get the Help of Professionals
Engaging professional advice is not just a placeholder to get the sale process moving, it is crucial to achieving a successful and fair outcome for you. A good legal advisor will be able to ensure that you have the core elements of the sale and what you need to protect yourself from the beginning, without any major oversights or missing items that only come out once a sale is underway. Having a legal advisor on board as early as possible helps to avoid missing opportunities, expensive amendments, digging around for further information and drafting and re-drafting the deal multiple times. Good legal advice ensures your business transfer agreement will: The legal advisor should consider the various contingencies of the sale and will help in the development of the transfer strategy. For example, if you are buying a business, you may want to run a competition check with the relevant government department or have a confidentiality agreement in place. The same applies for a vendor or a buyer of a business – you should seek financial advice from a qualified accountant who can help to determine your financial position and ensure the best possible result is achieved.
Example Business Transfer Agreement Template
The internet offers a wide range of reliable sample business transfer agreement templates that serve as a useful reference for buyers and sellers. Some notable legal websites where such sample templates can be found include legalzoom.com, nolo.com, and upcounsel.com. Each of these websites is designed to help buyers and sellers in their search for a form that can act as a template or guide for crafting a business transfer agreement.
The process of creating a business transfer agreement can be a complicated and expensive process. Sites like legalzoom.com, nolo.com , and upcounsel.com help to simplify this task by offering users a standard template to follow when drafting the agreement. While not necessarily a foolproof plan, using these sample templates as a guideline can help buyers and sellers avoid problems down the line that may occur if all requirements are not met.
If a good template is going to be helpful as a guide, then it should contain most, if not all, of the general components of a typical business transfer agreement. Some of the typical components that should be included in a business transfer agreement template are a seller identification section, a buyer identification section and a general section where details about the transaction can be inserted.