What Constitutes a Business Transfer Agreement?
A Business Transfer Agreement (BTA) is a document that establishes the terms and conditions of the transfer of ownership of an entity. A BTA may be self-drafted, or it can be prepared by a lawyer. In either case, the BTA will need to be executed and become an agreement supported by assets.
While many businesses transfer ownership through a simple sale of the stocks (applicable to corporations), or by a simple assignment of assets (applicable to limited liability companies or partnerships), or by a simple deed (applicable to other forms of entities), the many tax, legal, and governance reasons for the transfer could result in a BTA as the best approach. For example, if the transferor is a corporation built for research and product development, it may have hidden intellectual property assets. A simple stock sale may not achieve the true value of these assets , whereas a complete due diligence of the corporation would help define the exact value of the intellectual property and how it should be treated. One the buyer understands the business and the assets of the company, the parties may determine that it is better to sell the business through a BTA that spells out the exact nature of the sale and the valuation of the company that includes the assets.
As another example, if the business includes both an operating entity and a holding entity, the holding entity may need to be sold as part of the entire transaction to avoid structural issues down the line. Using a BTA may eliminate these problems.
BTAs are often not needed for simple or small transactions, but they provide many advantages for larger, more complex deals.
Essential Elements of a Business Transfer Agreement
A business transfer agreement, sometimes referred to as a business sale agreement, defines how the two companies will conduct business after the sale occurs. The business transfer agreement begins by identifying the selling and purchasing parties. From there, the agreement will list the terms of the sale. For example:
The next part of a business transfer agreement explains how the seller plans on transferring its assets to the buyer. This section is crucial as it ensures that both parties agree on what assets are being transferred. It will also include any exceptions to what the seller will be transferring.
If the business has employees, the agreement may need to outline whether or not the buyer or seller will retain or let go of those employees. This is commonly referred to as an "employment retention clause."
Any liabilities, such as debts, must be listed and categorized. They can be grouped by whether the buyer or seller will assume the debt. Of course, if all debts are being forgiven, this becomes an easy task.
It may seem irrelevant at first, but the closing date of the business transfer should be agreed upon in the business transfer agreement. The buyer and seller must decide well in advance when the transaction will take place.
The final section to a business transfer agreement is usually an assumption of liability. From there, the agreement is signed by both parties.
Legal Implications and Necessities in Agreement Drafting
Lawful and orderly transfer of business requires compliance with rules and regulations where the business is situated
When a business is transferred, certain legal considerations specific to the business and country must be taken into account. These in turn will impact the drafting of the business transfer agreement and the necessary approvals that will need to be obtained. These approvals may range from corporate authorisations for listed companies to industry regulators and sometimes even national security approvals where the transfer involves a security sensitive business. Such approvals would be needed before the business transfer agreement among the owners or shareholders of the business can be made effective.
Tax and exchange control considerations
Tax implications are often the other legal consideration that must be factored into any business transfer transaction. Transfer duties, VAT and stamp duties may need to be paid, but in certain cases exemptions may apply. Careful examination of the transfer by a tax expert would ensure that the structure chosen for the business transfer will not inadvertently give rise to adverse tax consequences. For example, if the assets of the business are held both in South Africa and in a foreign country, the assets held in the foreign country may incur capital gains tax or withholding tax with transfer into South Africa. In addition, exchange control approval may be needed for foreign currency payments from South Africa for the purchase of foreign assets. Any tax and exchange control considerations will need to be addressed when drafting the business transfer agreement. Failure to obtain the necessary tax and exchange control approvals may result in the agreement not being given legal effect by the relevant authorities and sanctions for contravention of exchange control regulations may arise.
Implications for drafting the business transfer agreement
Once the regulatory framework has been assessed, including the conditions that must be complied with, this will provide guidance as to what must be provided for in the business transfer agreement and its appendixes. The transaction structure and the key agreements must be set out in the business transfer agreement. In addition, the legal and regulatory conditions that must be satisfied prior to effectiveness must be attached to the business transfer agreement.
How to Formulate a Business Transfer Agreement
When structuring a business transfer agreement, there are a number of essential sections to include. In these agreements, it helps to avoid a laundry list of terms that list nothing more than what is being transacted and at what price. A good, transaction-specific business transfer agreement will have sections that neatly wrap around the items being transferred and the terms of the agreement, so as to protect the interests of both parties without padding with unnecessary sections or clauses.
A standard structure for a cursory examination of the agreement includes the following sections (not necessarily in this order):
- Date of Agreement and Parties Involved: Before any other term can be evoked, there must be an accurate date of full execution and the parties involved in the agreement.
- Definition of Business Assets and General Terms: Once the parties are introduced, the following section will broadly discuss what is involved in the transfer agreement, along with a basic description of the business assets involved (stock, real property, bank accounts, etc.), as well as the terms of the agreement (non-compete agreement, return of equipment, etc.).
- Disclosure Statements: This section can vary significantly by the type of transaction being conducted, but should generally list items that were disclosed prior to the execution of the agreement regarding any potential problems or issues with the assets being transferred.
- Covenants and Conditions Precedent: In this section, any obligations that either party must fulfill prior to the closing date or the exchange of assets are discussed. This typically includes missing paperwork to complete a sale to the satisfaction of the consideration only if the delivery of said documents applies to the purchase of assets.
- Closing Mechanism: Covering all aspects of the closing mechanism, this section will list any money that will change hands, what date it will take place, responsibilities of the buyer and seller as to closing, and conditions that could lead to a postponement of closing or renegotiations, including contingencies such as the buyer accessing financing for the purchase and confirming it is in working order.
- Miscellaneous Provisions: Consisting of terms to clarify the agreement, this section may include items such as allocation for taxes and fees, potential limitations of liability, and enforcement procedures in the event of a dispute, among other items.
- Exhibits and Disclosure Letters: Typically this section will list items that were presented prior to the agreement but that are not necessary to understand the terms or scope of the agreement, including tax returns, books and records, incorporation documents, and other past business documents to prove viability.
Avoidable Pitfalls
Like any other legal document, business transfer agreements bear a lot of responsibility. Poor drafting may give rise to misunderstandings, disputes, and even litigation; therefore, it’s important to consult an experienced franchising and distribution law attorney to help you map out a good plan for your business transfers. Below are some of the most common pitfalls and ways to avoid them: Not considering the specific situation: Every business transfer scenario is different, whether it is a franchising situation or simply a sale or purchase. Not considering the unique circumstances of your business transfers during drafting could lead to huge mistakes, or the inability to make the sale or purchase at all. Speaking of considerations … failing to fully consider, and calculate into the agreement, what you expect to gain from the business transfer agreement could be a major flaw as well . You should spend an appropriate amount of time fully evaluating all aspects of the transfer, and work with your attorney to ensure you have reasonably accounted for everything you hope to gain. Relying on a form agreement or template: Again, no two franchise situations are the same, so using a cookie-cutter approach could result in an agreement that doesn’t fully protect your rights or best interests. Always work closely with your attorney to customize an agreement for your particular needs. Neglecting related legal issues: There are many legal issues that are often related to a business transfer, including intellectual property, employment, privacy, service agreements, sales, leasing, non-compete and non-solicitation agreements, and liability management and insurance, to name a few. If all of these contingencies of a business transfer agreement are not drafted and covered, it could lead to significant problems down the road.
The Involvement of Lawyers and Other Advisors
Given the complexity of the business transfer process, professional legal advice should be sought when preparing a business transfer agreement. A sale of business agreement is a complicated document. Depending on the size and nature of the transaction, the preparation of a business transfer agreement may call for the assistance of professionals in a number of fields. Sometimes the most efficient way to obtain the services of these professionals will be to seek the assistance of an experienced business lawyer who will be able "to assemble a team" from a network of professional contacts. An experienced lawyer will also make the best use of these specialist services by coordinating the work so that it is request oriented and the charges to be rendered are efficiently generated.
Examples and Scenarios
As with any binding contract, the business transfer agreement will be largely determined by the circumstances of the deal and what each party wants to protect. In the following discussion, we will look at two real-life examples of business transfer agreements with mixed results.
I want to preface this section with a warning. The following examples may not be entirely representative of the types of transfers that most business owners can expect to face, but they are based on actual events with real companies. All names have been changed.
Laurie and Asher are partners in an online magazine start-up which has just begun to take off. An angel investor offers to fund their magazine for the next year in exchange for 45% equity in their magazine and two board seats. Laurie and Asher eagerly accept the investment and draw up a business transfer agreement. They set a price of $20,000 for 35% equity. They plan to roll over 15% equity to the investors, giving them a total of 45%. When asked by the angel investor, they tell him that both their partner’s mothers work for the magazine part-time. The angel investor negates the deal, learning that their mothers will be paid salaries rather than Mama sweat equity.
Lessons learned: One of the great things about being an entrepreneur is that you have almost complete freedom to make the rules as you go along. If you want to give away 35% of your business to an investor, you’re free to do that. As a prudent business owner, though, you should be thinking objectively and unemotionally. Laurie and Asher wanted, more than anything, to get the investor the next level of growth. So much so, that they agreed to give away 35% of their business in exchange for $200,000 without thinking that they were giving away too much equity too soon. The investor, meanwhile, was attracted to the concept but still exercised his right to verify assertions made in the business transfer agreement before signing.
In the following example, the entrepreneur’s failure to have a business transfer agreement in place cost him everything. Mel’s office furniture store had signed a three-year agreement with a manufacturer to supply office furniture with the caveat that there would be no other exclusively furniture supplier on the market. Halfway through the deal, the manufacturer invoked breach of contract, claiming that Mel had made deals with 4 other competitors. Mel knew this to be untrue, but he had no contract to disprove it.
Lessons learned: While business owners are people with a unique take on life and business are often among the most sentimental people in the world, they must still be practical. Without a business transfer agreement to proof his innocence, Mel could not save his business. It is vital that owners create these types of agreements for the protection of all parties involved.
Future Developments
Theoretical advancements in communication and digital transfer will likely continue to put pressure on physical business transfer agreements, resulting in continual refinement of relevant clauses. Additionally, the growing prominence of data protection laws relating to confidential information will mean that future business transfer agreements will need to more explicitly govern the transfer of confidential information, particularly of personal data .
On an international scale, globalization and decentralization will continue to require transfer agreements that account for the shifting demands of larger and more mobile workforces. The very nature of the agreement will likely continue to expand to include a wider range of transferees including independent contractors and contract services personnel, instead of just employees.