Business Sale Contract Template

Business Sale Contract (Debtors Creditors And Property Not Transferred) With Guarantee

CO.AS.06

This Business Sale Contract (Debtors, Creditors and Property not Transferred) with Guarantee is also frequently referred to as a Asset Sale/Purchase Contract or Agreement.

The Business Sale Contract (Debtors, Creditors and Property not Transferred) with Guarantee is most appropriate for use by a holding company that is selling the business (known as the assets and undertaking) of one of its subsidiaries but not the debtors, creditors or real property. The process of selling a business is more complicated than selling all the shares. It is necessary to identify all the assets and liabilities of the business and for the Buyer to decide which assets and which liabilities will be transferred. Following this will be some formalities for transferring title to each and every asset. Novation of certain liabilities which are also transferred may be necessary.

There are a number of alternative Business Sale Contracts in the Business/Asset Sale Agreements folder. These contracts/agreements are provided to cover a range of different commercial scenarios.

This Business Sale Contract is in open format. Either enter the requisite details in the highlighted fields or adjust the wording to suit your purposes. Optional phrases / clauses are enclosed in square brackets. These should be read carefully and selected so as to be compatible with one another. Unused options should be removed from the document.

This Business Sale Contract is guaranteed. The guarantor will usually be the holding company of the company selling its business but it could also be the individual shareholder or shareholders of the company selling its business. The guarantor guarantees the obligations of the Seller. The reason for this is that, if the Seller has no more assets after the sale, it may be wound up or the cash will be returned to the shareholders. This means that the Seller will not be worth pursuing for a breach of warranty.

The names of the parties should be inserted at the head of the agreement.

At clause 1 (interpretation) a definition for Accounts Date should be inserted. This is the date when the previous accounting period ended. The definitions of “Accruals”, “Creditors” and “Prepayments” should be tailored to your circumstances. The wording in square brackets should be chosen so that either payments in connection with the property are included within the definitions of “Accruals”, “Creditors” and “Prepayments” respectively or not. The definitions of “the Bank”, “the Business”, “the Buyer’s Solicitors”, “the Disclosure Letter”, “Goodwill”, “GPP”, “Life Assurance Scheme”, “Pension Scheme(s)”, “Personal Pension Scheme(s)”, “Stakeholder Scheme”, and “the Seller’s Solicitors” should be completed. If Management Accounts are being provided by the Seller then date to which they are made up should be included.

Clause 2 specifies the assets included in the sale. Book Debts are not included in the assets under this agreement. Other versions of the agreement are available where the Book Debts are included in the assets. The assets Plant, Contracts, Intellectual Property Rights, and Property are detailed in the schedules.

Clause 3 lists the assets which are excluded from the sale. Excluded assets are shares or other securities held by the Seller, cash in hand or at the bank, any right to a credit of tax, Book Debts, any amounts owed to other members of the group, the Seller’s accounting records, real property and the Third Party Assets which are dealt with in clause 23.

Clause 4 refers to schedule 9 which lays out details of the purchase price. Under this agreement, the purchase price is entirely in cash. In the Schedule, there is an option to choose between payment for the transaction being made by banker’s draft in favour of the Seller or the Seller’s Solicitors, or by telegraphic transfer to a designated account. Since many completions tend to take place at uncivilised hours (and thus outside normal banking hours!) an undertaking should be signed. Please see the related documents for two examples of undertakings that may be used.

Clause 5 sets out the usual position where the sale and purchase of the business is a “transfer of a business as a going concern” and thus will not be regarded as a supply of goods or services for VAT purposes. At clause 5.5, it must be decided whether the Seller and Buyer will make a joint application to HM Revenue & Customs for the Buyer to be registered for VAT under the Seller’s VAT number. Clause 5.6 states that the Buyer will pay the Seller the VAT payable if HM Revenue & Customs determines that it is due. This area is difficult and technical, and specialist advice should be taken.

Clause 6 sets out the completion arrangements. These usually take the form of assignments. A general assignment of the main assets under this agreement is available to download under the related documents. A Patent Assignment and a Trade Mark Assignment are also available to download if required. Most companies will be subject to fixed or floating charges these will require formal deeds of release which are also available to download in the related documents. A letter confirming non-crystallisation of the floating charge may also be required and can be downloaded from the related documents links. The Seller must hand over the VAT records to the Buyer unless given permission not to by the local VAT office.

Clause 8 states that the Buyer will act as agent for the Seller in collecting the Book Debts and will pay over the amounts received. If a debtor owes both the Seller and the Buyer money, then the debtor may specify to which debt the payment relates. If he does not then the money will be allocated to the oldest debt (unless this debt is disputed or the amount corresponds exactly to another debt). The clause also sets out how periodical charges that are not defined as Pre-payments are apportioned by way of an Apportionments Schedule.

Clause 9 states that the Buyer will be assigned the benefit of the Contracts. However, the burden of a contract (i.e. the obligations of a party under a contract) cannot be assigned without the consent of the other party. One way of achieving this is to execute novation agreements where the Buyer, the Seller and the other contracting party enter into an agreement where the Buyer steps into the shoes of the Seller and the Buyer will usually assume liability for the obligations of the Seller at the point of novation. Since this process is rather cumbersome and time consuming, the agreement states that the benefit of the Contracts will be formally assigned and both parties will agree to use reasonable endeavours to obtain third party consents to the assignment of the burden of the Contracts.

Clause 10 states that the Buyer is responsible for satisfying any claims for defective goods but is entitled to be reimbursed in full by the Seller.

Clause 11 deals with the employees. Due to the operation of TUPE, the employees of the business transfer automatically to the Buyer. Without an agreement in place, the Buyer will take on the rights and powers of the Seller in relation to the employees together with the Seller’s duties and liabilities towards them. For this reason, the agreement ensures that the Seller indemnifies the Buyer for all matters that took place before Completion. In a similar way, the Buyer indemnifies the Seller for any matters taking place after Completion. At clause 11.5, there is optional wording depending on whether employees have taken holiday in advance for have accrued holiday entitlements which they have not taken at Completion. The appropriate wording should be chosen and the other option deleted.

Clauses 12 and 13 deal with property arrangements. At clause 12.1, the Buyer is required to remove the Plant from the Property without causing any damage. It is assumed at Clause 13 that any leasehold property will be sold although it is possible to add further provisions at clause 13.2.

Clause 14.3.1 specifies that the maximum liability of the Seller under this agreement for all claims aggregated together is the purchase price. However, there is an exception for breaches of the warranties in paragraph 1 of schedule 7 (which relates to ownership of the assets and authority to sell) and of breaches of the Tax Warranties. If the Seller is not in a position to sell, then they should have no limit to their liability.

However, in clause 14.3.2 the Seller is given some protection from claims being brought for trivial breaches and so it is possible to specify a minimum value of each claim (at clause 14.3.2.1). If the value falls below this amount, then the claim is ignored (this is the ‘X’ amount in the form field). A figure should be inserted in the form field such as £1,000 (the amount will vary depending on the total value of the transaction). Furthermore, at clause 14.3.2.2, it states that no claims may be brought unless all the claims of the ‘X’ amount equal or exceed a threshold (the ‘Y’ amount) such as £10,000. So, in our example, if the buyer has 9 individual claims of £1,000, he will not be able to make a claim because the threshold of £10,000 has not been reached. However, if he has 10 claims of £1,000 then he will be able to make a claim. Moreover, the buyer will be able to claim for the whole amount, not just the excess over the £10,000 threshold.

Clauses 15 and 16 protect the Buyer by placing restrictions on the use of confidential information and preventing the Seller from setting up a competing business or soliciting the Business’s customers.

Clauses 15.3 and 17 also prevent the Seller using the name of the Business or any name confusingly similar by requiring the Seller to change its name at Completion. Note that the definition of Goodwill can include the right to use the name of the Business.

Clause 18 clarifies that title to the Assets will pass to the Buyer at Completion.

Clause 19 sets out mutual indemnities for keeping the books and records held by each party and making them available to the other.

Clause 20 governs what happens to assets that are owned by third parties, e.g. under a lease, rental, or hire-purchase. Many of these will be essential to the Business and it will be sensible in most cases to negotiate with the finance company concerned in advance of completion otherwise there is a risk that the asset will be repossessed. The agreement states that the parties will use reasonable endeavours to obtain the consent of the finance companies as soon as possible after Completion. Until that happens, the Buyer will comply with the agreements and will indemnify the Seller for any breach of the agreements. There is a three month cut-off point where, if no consent has been obtained, the Buyer can either continue with the present arrangements or return the asset concerned. The Buyer is not required to pay any “renewal fee” required by the finance company for the privilege of having the contract transferred to the Buyer.

Clause 21 is an optional clause where the buyer gives an undertaking to attempt to obtain the release of the Seller from a specified guarantee and agrees to indemnify the Seller against any liability arising after Completion. This will often be useful to the transaction is completed in a short space of time and the Seller has given guarantees to, for example, its bankers or its landlord.

Clause 22 contains the guarantee of the Seller’s obligations by the Guarantor.

Clause 23 makes it clear that no third party can enforce any of the provisions of the agreement.

Clauses 24-34 are “boiler plate” clauses that do not have much impact on the transaction but which lawyers include for good measure. These should not be amended unless there are very good reasons for doing so.

Schedules 1, 2, 3, 4, 5, and 6 should contain details of Contracts, Employees, Intellectual Property, Plant, Property and Third Party Assets respectively. It may not be possible to have a list of all the Contracts depending on the nature of the business and each transaction will have tailored agreement.

A detailed set of warranties is included at Schedule 7. The amount may appear daunting at first but they are a fairly standard set of warranties designed both for the protection of the seller and the buyer. The Seller can easily make disclosures against the warranties (in the Disclosure Letter) and the Buyer can learn as much as possible about the Business.

Paragraph 7.4 of Schedule 7 should be used if Management Accounts are being produced. Paragraph 15.3 allows further pensions warranties to be included if needed. A warranty as to the accuracy of replies to due diligence enquiries is at paragraph 17.2 and the date of those replies should be included. A short set of Tax Warranties is included at paragraph 18. Since the shares are not being sold, the Buyer will not acquire the tax liabilities of the Seller and so these do not need to be as detailed as in a share sale and purchase agreement. However, the Buyer will want warranties in relation to the tax treatment of the Assets, Plant, Property, and Employees.

Naturally, every transaction differs from another and discretion should be used by the advisors to the Seller and Buyer as to which warranties are most appropriate.

Schedule 8 can be used for detailed pension arrangements.

The Business Sale Contract is not a deed so it can be signed by one person who is authorised to do so by the Seller, the Buyer and the Guarantor respectively.

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