In our earlier article, we set out the importance of identifying and reviewing key Contracts and Licences. As part of the business sale process it is likely that the transfer of key Contracts and Licences will be required to procure the sale of the business.
Commonly referred to as “assigning” or “transferring”, the process to transfer a key Contract typically involves seeking the consent of a third party to transfer the relevant Contract or Licence. If approval is granted to the transfer, an agreement is made which transfers the rights and obligations of a Seller to a Purchaser with the agreement of a third party.
It is important to properly understand a Seller’s legal obligations when assigning a Contract or Licence. Not all transfers are the same particularly as it may relate to on-going liabilities of the Seller and the types of indemnities and on-going obligations a Seller may have after the sale of the business.
Process – Some Aspects
When preparing a Business Sale Agreement, it is recommended a Seller consider the type of key Contracts and Licences that needs to be transferred to a Purchaser. Not all Contracts or Licences of a business are essential for the operation of a business. However, it is likely that any Purchaser of the business will want to ensure that it is not obliged to buy the business until such time as the key Contracts and Licences have been transferred.
It is also recommended that as part of the Business Sale Agreement consideration be made as to what requirements are imposed upon a Purchaser when looking to transfer key Contracts and Licences. Importantly, a Seller needs to consider who will seek a transfer of a Contract or Licence, what information a third party will require to approve a Purchaser and what will be the costs of seeking a transfer of a Contract or Licence. Consideration will also need to be had as to what time both Seller and Purchaser are prepared to give to allow a transfer process to take place. In this regard, some approval processes are mandated under the Agreement or under the Law (for example, there are deemed assignment provisions under the Franchising Code of Conduct and the Retail Leases Act).
When applying of an assignment it is important that the Seller understand what information will be required by the third party to approve the transfer. Typically, the Contract or Licence will set out the types of material required to approve a transfer. From a Seller’s perspective it is important that the Purchaser have the capacity to provide the information necessary to satisfy the transfer request. For example, where a Licence requires that the Purchaser have particular qualifications (for example, holding a Class 1 Agents Licence to operate a Real Estate Business), it become essential that the Purchaser be able to provide that information in a timely manner sufficient to satisfy the transfer requirements.
When preparing the Business Sale Agreement the Seller should set out clear criteria as to what the Purchaser must do to facilitate the transfer of the Contract or Licence. That criteria would include the following:-
- Details of the proposed Assignee (being the Purchaser of the business);
- Confirmation as to the timing of the proposed transfer;
- Agreements in relation to the provision of any required replacement security.
As noted above, there may be costs associated with seeking a transfer of a Contract or a Licence. For example, most Franchise Agreement will require that a “Transfer Fee” be paid to the Franchisor upon the approval of a transfer. Other costs such as Training Fees and third party Legal Costs may also be imposed as part of the transfer process. Accordingly, the Seller should always consider who bears responsibility for the payment of these costs or otherwise ensure that the third party costs are incorporated into the sale price.
Most businesses will require that some of its Contracts or Licences are transferred to a Purchaser. The transfer process can be complication and costly. It is essential that when undertaking a sale of the business and doing the deal, that the Business Sale Agreement properly identify the key Contracts or Licences to be transferred and the process that both the Seller and the Purchaser agree to adopt when seeking that transfer approval.
If you would like to discuss a Business Sale & Purchase or require more information please contact: Heath Adams (Director-Lawyer), Amelia Hatton (Associate) or Shalvin Kumar (Solicitor).
Written by Heath Adams.