The main clauses of a business transfer contract

The transfer of a business is a complex process involving many legal and contractual aspects. The business transfer contract is a key document that governs the terms of the transaction and protects the interests of the parties involved. This article examines the main clauses of a business transfer contract and their importance for the parties involved, with a particular focus on GAP.

Summary of the main clauses of a transfer contract

Identification of parties and object

The first step in drafting a business transfer contract is to clearly identify the parties involved (transferor and transferee) and the subject of the contract, i.e. the business to be transferred.

Sale price and payment terms

The contract must specify the price at which the business will be sold, and the terms of payment. These terms may include cash payment, payment in instalments over a specified period, or a combination of both.

Asset and liability warranties

The guarantee of assets and liabilities (GAP) is an essential clause that protects the transferee against the risks associated with the assets and liabilities of the transferred company. The transferor undertakes to indemnify the transferee in the event of the discovery of hidden liabilities or problems affecting the value of the assets after the transfer.

Non-competition clause

The non-competition clause is designed to protect the transferee against competition from the transferor after the transfer of the business. It generally defines the duration of the prohibition on competition, the geographical scope concerned and the type of activities prohibited.

Confidentiality clause

The confidentiality clause stipulates that the parties undertake not to divulge any confidential information obtained during the transfer process. This clause is particularly important to protect trade secrets, customer data and sensitive financial information.

Conditions precedent

Conditions precedent are events or conditions that must be fulfilled before the sale becomes final. Common conditions precedent include regulatory approvals, the agreement of business partners or shareholders, and satisfactory due diligence.

Cost allocation clause

The cost allocation clause specifies how the costs associated with the business transfer, such as consultancy fees, legal fees and registration fees, are to be allocated between the transferor and the transferee.

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Focus on GAP (Garantie d'Actif Liif)

The guarantee of assets and liabilities (GAP) is a crucial clause in a business transfer contract. It protects the transferee against the risks associated with the assets and liabilities of the transferred company. In this article, we explore GAP in detail, its role, mechanisms and implications for stakeholders.

1. Definition and purpose of asset and liability warranties

GAP is a contractual clause whereby the transferor undertakes to indemnify the transferee in the event of the discovery of hidden liabilities or problems affecting the value of the assets after the transfer. The main purpose of the GAP is to protect the transferee against the financial and operational risks associated with taking over the business.

2. Scope of the asset and liability warranties

GAP generally covers the following elements:

a. Assets : Assets include property, plant and equipment, intangible assets, inventories, trade receivables and other assets. ALM protects the transferee against impairment of these assets due to undisclosed or unknown factors at the time of transfer.

b. Liabilities : Liabilities include debts, provisions for risks and charges, taxes and other liabilities. ALM covers hidden liabilities, i.e. those that were not known or disclosed by the seller at the time of disposal.

3. Mechanisms of asset and liability warranties

a. Indemnification: In the event of the discovery of hidden liabilities or problems affecting the assets, the transferor is obliged to indemnify the transferee for the loss of value suffered. Indemnification may take the form of a cash payment, a reduction in the transfer price, or a combination of both.

b. Ceiling and deductible: ALM may include an indemnity ceiling, which represents the maximum amount the assignor is required to pay in the event of a claim. A deductible may also be included, meaning that the assignee can only claim compensation if the amount of the loss exceeds a certain threshold.

c. Duration : The duration of ALM varies according to the specifics of the business and the transaction. It may be limited to a specific period after the disposal, generally between one and three years, or extended for certain specific liabilities, such as ongoing litigation or tax risks.

4. Negotiation of asset and liability warranties

ALM is often one of the most delicate points when negotiating a business transfer agreement. The parties must strike a balance between protecting the transferee's interests against the risks associated with undeclared liabilities or overstated assets, and taking into account the interests of the transferor, who wishes to limit his financial liability after the transfer. To achieve this balance, the parties can discuss the duration, amount and scope of the guarantee, as well as mechanisms for settling any disputes arising from the ALM. It is advisable to consult lawyers specializing in business law to help you reach a fair agreement tailored to the specifics of the transaction.

Wexlinks Formation : the only training course in France dedicated to business transfers. 5 online modules to help business owners prepare for the sale of their company: https: //formation.wexlinks.fr/transmission

Focus on formulating the sale price

The main purpose of the price clause is to determine the amount to be paid by the transferee to acquire the business. It must be clear, precise and reflect the value of the business, taking into account the assets and liabilities, growth prospects and associated risks. The price clause must also set out the terms of payment, such as due dates, financing conditions and any guarantees.

Here is a list of different examples of how to formulate the price in a business transfer contract, taking into account various variables:

Sale price = Enterprise value - Net debt This formula takes into account the enterprise value (EV) and subtracts net debt to determine the sale price. Net debt is equal to the company's financial debts minus its cash and cash equivalents.
Sale price = (EBITDA multiple) x EBITDA - Net debt In this formula, the sale price is based on an EBITDA multiple (earnings before interest, taxes, depreciation and amortization), minus net debt.
Sale price = (Multiples of sales) x Sales - Net debt Here, the sale price is based on a multiple of the company's sales, less net debt.
Sale price = (EBITDA multiples) x EBITDA - Net debt This formula uses an EBITDA multiple to determine the sale price, from which net debt is subtracted.
Sale price = Net book value + Premium - Net debt In this formula, the sale price is calculated by adding a premium to the net book value (assets minus liabilities) and subtracting the net debt.
Sale price = Capitalization of profits + Net debt This formula involves determining the enterprise value by capitalizing the company's profits over a given period, then adding net debt to determine the sale price.

Two notions to be defined more precisely in these examples:

a. Net debt :

Net debt is a financial indicator that measures a company's financial situation in terms of indebtedness. It is calculated by subtracting cash and cash equivalents (i.e. liquid assets readily convertible to cash) from the company's financial debts.

Net debt is an important measure, as it takes into account the company's financial obligations (such as loans, bond debts, leases, etc.) and indicates the extent to which the company is able to repay its debts with its available cash. A positive net debt means that the company has more financial debts than cash, while a negative net debt indicates that the company has sufficient cash to repay all its debts.

b. Net book value :

Book net assets, also known as shareholders' equity, represent the difference between the total value of a company's assets and the total value of its liabilities. It is a key indicator of a company's financial position and solvency.

In a company's balance sheet, book net assets are the sum of shareholders' equity, comprising share capital, reserves, retained earnings and net income for the year. Book net assets represent the residual value of the company's assets after deduction of all liabilities. In other words, it is the value of assets that actually belongs to the company's shareholders after all debts and obligations have been paid.

Book net assets are often used to assess the value of a company, particularly in business sale transactions. However, it is important to note that book net assets do not take into account the value of certain intangible assets, such as brand names, patents or goodwill, which can be of significant value to the company.

In conclusion, each formula has its advantages and disadvantages, and the choice of the appropriate formula will depend on the specifics of the business and the transaction. It is important to consult a business valuation expert to determine the most appropriate formula for each situation.

Xval, a company valuation consultancy, can help you value your company : request a company valuation

Conclusion on the clauses of a transfer contract

The clauses of a business transfer agreement are essential to ensure a successful transaction and protect the interests of the parties involved. It is important to understand these clauses and to work with experienced professionals, such as the experts at XVAL, to ensure a smooth business transfer in compliance with current regulations.