The Ultimate Guide to Drafting a Business Transfer Agreement

The ABCs of Business Transfer Agreements

A business transfer contract is a written document that contains details about the sale and purchase of a business. It goes into detail about what is included in the sale so that both parties are aware of exactly what is being transferred as a part of the deal.
A business transfer agreement can be drafted by either the buyer’s or seller’s solicitor. A competent solicitor will know exactly what needs to be included in the contract, and they will also go into great detail. When the contract is not detailed enough, it can create problems later on. It is important to fully disclose any issues with the business , particularly so that the buyer understands what issues they may face in the future.
A good solicitor will include clauses in the contract stating that the purchaser agrees to purchase the shares in the company as they stand, including any issues discovered with the company. If the business is registered in a different country, it must still be in the name of the business. A business transfer agreement is an important part of transferring ownership, and is filed in the foreign country where the business is registered.

Fundamental Aspects of a Business Transfer Agreement

The key components of a business transfer agreement generally include the following: Parties, Assets and Liabilities, Terms of Transfer and Confidentiality.
Parties: The agreement must clearly identify both the seller and buyer. It is important that the legal names and business licenses be attached to ensure anyone looking into the matter can easily identify the parties involved. The most important factor is identifying the seller who is transferring stock, interest or assets to the buyer. Nothing is worse than calculating the transfer price and doing due diligence on a business only to find out an unknown person may have an interest in the business.
Assets and Liabilities: Business transfer agreements will always identify the assets and liabilities that are being transferred. Major assets often include accounts receivable, accounts payable, inventory, customer lists and contractual rights/obligations. All intellectual property will be defined but anything that is created as an employee or independent contractor usually belongs to the employer. Indemnity clauses can be used to protect the seller against any unknown liability that could arise after the sale closes.
Terms of Transfer: There are generally three common ways to transfer a business. One way to complete a business transfer is to sell the assets of the business. For example, if Apple were selling the iPhone business it would want to sell the name, inventory, intellectual property and all other physical and intangible assets. Apple will not want to own the previous owner’s debt once the transaction closes so the buyers of Apple can negotiate to have each party retain their respective debts. The one major issue with asset sales is the negotiation of the assumption of liabilities. A company will not want to assume all the other liabilities of the seller and it should only assume the liabilities that is able to control and foresee. The seller is then able to retain all other possible liabilities that could affect the company. It is important to draft the agreement to transfer all business assets and properties including all licenses such as liquor licenses, mobile food vending licenses and any other specialized licenses that are registered to the seller of the business.
A second way to transfer a business is from one corporation to another. This is done by merging the businesses together through a share purchase transaction. The shareholders of the seller will be required to sign an agreement regarding the sale of their shares to the buyer of the business. The agreement will require the buyer to purchase the seller’s shares in exchange for a predetermined consideration. A share sale will require more due diligence on the company as you are not just selling the assets of the company but all the rights and restrictions that come with the company. Being the owner of the corporation comes with substantial responsibility and liability. It is very important that the buyer complete their due diligence and ask a lot of questions of the seller to avoid any pitfalls later.
The final method to transfer a business is a partnership buyout. There are two types of partnerships that a seller can agree to transfer their business under. The first is a general and specific partnership where once the buyer agrees to sell their partnership interest to the third party, the existing partnership continues with a preservation of the existing partnership and division of the profits after the buyout. The second method is the partnership is terminated and the sales proceeds are distributed based on the partnership agreement or business corporation act. The partnership is ended and a new partnership is created with the new partner. This is the most common method to transfer a partnership interest. The main concern will be the business separation where an advertisement goes out to all customers giving the seller the opportunity to purchase the business. This period of time will allow the seller to sell the business assets and liabilities for the best price but provide the buyer with confidentiality around the sale of a business.
Confidentiality: Usually the seller will want confidentiality in regards to the business valuation and sale of the business. This includes the seller’s finances, business transactions and business assets. It is very common that this clause will be in most business transfer agreements.

Legal Guidelines in Business Transfers

When drafting a business transfer agreement, several legal considerations come into play to ensure compliance with relevant laws and to avoid potential pitfalls. Such aspects may include provisions in the Companies Act, and the Competition Act, the registration of the transfer with the local Deed Registry, obtaining necessary regulatory approvals, and examining the real prospect of the take-over falling within the scope of the Broad-Based Black Economic Empowerment Act or the Skills Development Act.
Companies Act 71 of 2008
Section 44 of the Companies Act, 2008 (the Companies Act) requires that board resolutions by both the seller and buyer be adopted for a company to enter into a sale of shares agreement. Companies must also be careful to comply with all other requirements set out in section 44 of the Companies Act when entering into a business transfer agreement.
Competition Act 89 of 1998
Depending on the size of a proposed business transfer transaction, the parties may have to notify the transaction to the Competition Commission in terms of section 13 of the Competition Act, 1998, prior to implementing the transaction if the transaction is prohibited without prior approval, and shall not implement the transaction unless they have been granted such approval. Specifically, the parties must notify the transaction to the Competition Commission, if the transaction meets certain thresholds as set out in section 13 of the Competition Act. Section 13(3) of the Competition Act provides an exemption from having to notify the transaction to the Competition Commission where:
Property Affixation and Deed Registration
As a general principle, in order for both movable and immovable property to be validly transferred from the seller to the buyer in terms of a business transfer agreement, the transfer must be effected in accordance with the relevant registration provisions set out in the Deeds Registries Act, 1937, for immovable property, and section 1 of the Transfer Act, 1988, for movable property. In this regard, it is sufficient compliance with section 2(1) of the Attorneys Act, 1979, if the agent employed by the parties to affect the transfer is a registered attorney, or an enormous risk will be borne.
The Constitution of the Republic of South Africa 1996
The Constitution requires that a public entity such as a municipality, must obtain the prior approval of the relevant Minister of Finance before disposing of any property to a company in terms of a business transfer agreement.

Example of a Business Transfer Agreement Template

[Date of Agreement]
THIS BUSINESS TRANSFER AGREEMENT (the "Agreement") is made as of the above date.
BETWEEN:
[Name of Seller]
(the "Seller")
AND
[Name of Purchaser]
(the "Purchaser")

1. DEFINITIONS
1.1 In this Agreement, unless the context otherwise requires:

"Business" means the business of [Nature of Business] carried on by the Seller at the Principal Places of Business and the Goodwill as a going concern as a separate legal entity on a going concern basis;
"Company" means [Name of Company];
"Consideration" has the meaning given to it in Section 3;
"Effective Transfer Date" means [Effective Transfer Date];
"Employees" means the employees of the Seller employed by the Seller at [Nature of Business];
"Excluded Assets" means the items set out in Part 3 of Schedule 1;
"Goodwill" means the goodwill of the Business as a going concern in the nature of the ongoing reputation and credit of the Business;
"Intellectual Property" means all intellectual property owned by, or licensed to, any Group Company relating to the Business including the Intellectual Property rights described in Part 1 of Schedule 1;
"Permitted Settlement" means any claim against the Seller for damages or compensation arising out of any negligence or wrongful act by the Seller in the course of carrying on the Business or exercising its powers as a trustee and whether in respect of liability at common law, contract, quasi tort, statute or otherwise;
"Principal Places of Business" means the premises set out in Part 2 of Schedule 1 and any subsequent premises of the Company;
"Purchase Price" has the respective meaning given to such term in Section 3;
"Restricted Area" means the area set out in Schedule 2;
"Settlement" means any claim material to the Business for damages or compensation arising out of any negligence or wrongful act by the Seller in the course of carrying on the Business or exercising its powers as a trustee and whether in respect of liability at common law, contract, quasi tort, statute or otherwise;
"The Parties" means the Seller and Purchaser; and
"The Purchase Timing" means [The Purchase Timing].

  • BUSINESS TRANSFER
  • 1 The Seller sells and the Purchaser purchases the Business with effect from the Effective Transfer Date for the full amount of the Purchase Price in accordance with the terms of this Agreement.
  • PURCHASE PRICE.
  • 1 The Purchaser will pay the Purchase Price to the Seller in accordance with the following:
  • 2 The Purchaser must pay the Purchase Price for:
  • EMPLOYEES
  • 1 The Purchaser must offer employment to all Employees on the basis that:
  • 2 If any of the Employees accept an offer of employment from the Purchaser "on or about" the Effective Transfer Date, the Purchaser must pay the purchase cost of all accrued entitlements (including without limitation annual leave, sick leave and long service leave) to the Effective Transfer Date.
  • PROPERTY OF COMPANY
  • 1 The Seller will on request of the Purchaser use its best endeavors to assign to the Purchaser the benefit of all relevant contracts, including leasing arrangements, on the terms of this Agreement.
  • 2 The Purchaser or it’s Solicitors will attend to all stamping of this document, making provision for such cost to be borne by the Purchaser.
  • WARRANTIES OF SELLER
  • 1 The Seller warrants to the Purchaser that:
  • 2 The Purchaser cannot rely upon any statement or representation or warranty or undertaking made by the Seller or any other person not actually contained in this Agreement.
  • WARRANTIES OF PURCHASER
  • 1 The Purchaser warrants to the Seller that:
  • MISCELLANEOUS
  • 1 Except as specified in this Agreement, there are no conditions that are precedent to the obligations of either of the Parties to this Agreement.
  • 2 This Agreement will inure to the benefit of and be binding upon the successors and assigns of the Parties.
  • GOVERNING LAW

Useful Tips for Negotiating a Business Transfer Agreement

When it comes to negotiating the terms of your business transfer agreement, you have to be willing to compromise. An agreement is a way of bringing the parties together and establishing a set of rules within which they will operate. Understanding where you can compromise and where you need to stand firm depends on understanding the deal you’re making.
The price for the sale of the business: Even if your advisor believes based on his or her financial modelling that the numbers support a minimum or maximum price, depending on who you’re negotiating with, you may have to go outside of these terms. Pay attention to personal valuations that are made within the business as these may reflect a true opinion of the current and expected value of the business . If you want to keep the business within the family or be a partner as a minority shareholder after the sale, the price may have to be lower than expected.
Representations and warranties, including indemnities and limitations: The next most contentious area is regarding the representations and warranties. This is a catch-all set of clauses that allow for the transaction to be closed by both parties representing that certain items exist (or don’t exist) and that these items form part of the basis of the contract. The largest value for groups who are dealing in multiples of EBITDA will be when shares are transferred and the seller seeks recourse in the case of earnings not being realized as expected or depends on the calculation of the net working capital. In this case the contract should specify the valuation and rights of recourse.

Pitfalls to Avoid in Business Transfers

When it comes to transferring a business, a few common mistakes can easily be avoided if you remain diligent about the process:
Insufficient Due Diligence
Failing to carry out thorough due diligence may leave certain areas problem open and unaddressed in the Business Transfer Agreement. You should assume the task of properly auditing the business, and documenting the results (whether they are good or bad) for the purposes of the finalizing the agreement.
Poorly Drafted Legal Agreement
Due to the potential complexity of a business transfer, details commonly omitted include obligations, warranties, representations, liabilities and limitations of indemnity. When these are missing, the causes of actions are not properly set out, leaving the parties with vague references that can lead to problems in the transfer at a later time.
Being Unfamiliar with Business Transfer Agreements
Alternatively, unfamiliarity with the agreements surrounding a business transfer can lead to a poorly drafted document. It’s never a good idea to attempt to write your own business transfer agreements without the assistance of a legal professional, as this can also lead to the omission of important elements. Many risks can be avoided by hiring a commercial lawyer to handle your agreement.

Concluding and Signing the Agreement

Once you have a mutually agreed upon agreement for the transfer of your business, the natural next step is to finalize and execute the business transfer agreement. However, prior to bringing it across the finish line, it is a good idea to go through the agreement in its entirety to ensure that the parties have covered all the fundamentals and accounted for them in the agreement. Also, you should make sure that both parties have had all of their questions answered and have performed due diligence (e.g. review of books and records) to their satisfaction to avoid any "surprises" after the agreements are signed and funds are transferred. And last but not least, it is a good time to check on the informing of other stakeholders, if necessary, and make sure that no additional approvals are needed in order to finalize the transaction.
Once the agreement itself has been finalized, it is time for the parties to sign off on the dotted line. This is typically a simple matter, but because this is a business transfer, it important to be mindful of the applicable laws relating to the type of entity involved in the transaction. For example, in the case of a corporation, you want to ensure that you have obtained the necessary authorizations from the Board of Directors and/or Shareholders of the corporation. If the Buyer or Seller is an LLC or a Limited Partnership, you want to consult the operating or partnership agreement of the entity, and any applicable state laws, to make sure that you are in compliance with applicable laws prior to finalizing the deal.
In addition, it is a good practice to provide for the ability to close the deal remotely , especially considering the fact that circumstances beyond one’s control may arise (such as death, incapacity, or government travel restrictions) prior to the time the closing is to take place. If and when these types of unforeseen circumstances arise, it is important to designate one representative on behalf of each party who has the ability, on behalf of the other members of their respective parties, to have the authority to make any necessary decisions that may be required prior to the time the business transfer agreement is signed by all parties.
In addition to signing the business transfer agreement and related documents by the parties, there are other steps that may need to be taken as part of the closing process and can also be outlined in the agreement. These could include obtaining third party approvals (e.g. consents or releases), acknowledgement of fully transferred assets and/or final payments, the release of escrows, repayment of loans, and ensuring compliance with all closing conditions (if any). Although it may be indispensable for some of these issues to be resolved at the time of closing, in other cases this may not be as critical and can potentially be dealt with later on through cooperation and negotiations.
Finally, it is a good idea to review the closing conditions and follow up with the other party to make sure that all of the closing conditions have been met. Where possible, you should have in hand all of the documents related to the business transfer agreement in order to close the transaction and relocate your funds in a timely manner. In addition, it may be a good idea in this case to make sure funding sources are set to be released to cover closing costs once the transfer has been finalized.

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