A Business Transfer Agreement is an agreement stating the transfer of assets and liabilities of a business between the seller and buyer. The idea is to transfer the ownership of business which ultimately transfers the assets and liabilities associated with the business. Since the money involved in the transfer of large assets is enormous so the buyers are given a facility to pay over a period of time which is known as a gradual sale. The upright sale, on the other hand, leads to the immediate transfer of assets or ownership on the closing date resulting in buyer paying the entire amount in one go.
TYPES OF BUSINESS TRANSFER
The transfer of business can be of two types asset sale and the entity or stock sale. They both are carried out depending on the choice of buyer and seller. Usually, the buyers prefer to buy assets as they can accrue depreciation benefits levied on fixed assets from the seller. The Seller, on the other hand, prefers to do an entity sale as it is beneficial to pay taxes on a low long-term capital gain rate.
NECESSARY STEPS TO BE FOLLOWED BEFORE SELLING OR PURCHASING THE BUSINESS
Letter of intent– It is an informal letter stating the price of the sale of a business and other various details about assets and liabilities. Once the buyer is located, it is advisable to frame a letter of intent which is an informal non-binding document. It gives both parties a fair opportunity to know about the transaction of sale such as purchase price, the subject matter of transfer, payment date, closing date etc. Along with the letter of intent, it is appropriate to get a binding confidential agreement signed so that the trade secrets of the seller are not misused by the buyer during the initial phase of negotiations for business transfer.
Due diligence by both parties – For a buyer, it is very important to do a diligent inquiry about the business structure, competition in the market, threats to the product or services of the seller. The buyer may want to see the sales reports, tax audits, employee’s payrolls, benefit schemes etc. At the same time, it becomes crucial for the seller to carry out due diligence as to what business plans does the buyer have in mind, how the business is going to be run after the ownership is transferred etc.
FORMATION OF BUSINESS TRANSFER AGREEMENT
Once the due diligence is carried out, the formal agreement for business transfer can be made. It is a legal document listing down all the contents of transfer of assets and liabilities as per the mutual understanding of the parties. It is advisable that the seller makes a personal representation stating that there is no pending litigation restricting the vendor’s right to engage in the sale of business.
A warranty, on the other hand, is a term which puts an obligation to indemnify the other party from all costs arising after the closing date. Both representations and warranties define the rights and responsibilities of both buyer and seller. Some representations and warranties go on to form the basis of transfer agreement which means that if they are unfulfilled the agreement stands non-binding.
It is important to ensure that the mechanism used for valuation of the business is accurate for the purpose of transfer of business. An ideal agreement must contain clear terms and arrangement for the payment and delivery of possession of assets or stock.Looking for Business Transfer Agreement? Contact Docket Tech Solutions.
Looking for Business Transfer Agreement? Contact Docket Tech Solutions.