A Brief Introduction About Transfer of Ownership Agreement
When a sale of a business takes place, a transfer of business ownership agreement is signed by the buyer and the seller of the business. The agreement will contain the terms of the sale, inclusions and exclusions, any other provisions or guarantees.
Transferable ownership rights
The shares of a company given ownership rights to the shareholders. When the shares are sold, there is a transfer of ownership rights. Ownership transfer is not restricted to just shares of a company; it is applicable to transfer of copyright as well. When the copyright owner wants to transfer exclusive rights, either wholly or partly, then this agreement is required.
How to change the ownership percentage of LLC
It is advisable to incorporate an ‘ownership transfer’ clause in your operating agreement. Otherwise, the LLC may have to be dissolved. The ownership can be changed by transferring the membership interest. The LLC can buy back the shares of the member who is departing. When you want to transfer business ownership, you will need an agreement that will include details like the buyer and the seller of the business, the purpose of the agreement, governing laws, terms of payment and any other provisions.
Who Takes the Transfer of Ownership Agreement – People Involved
A transfer of ownership contract takes place between the buyer and the seller of the business. The ownership is transferred to the buyer by selling the shares of the present owner through this agreement for a mutually agreed consideration.
Purpose of the Transfer of Ownership Agreement – Why Do You Need It
When a business owner wants to sell a part of the entire business, it is important to find the right buyer who will be willing to pay the fair market price for the business. The buyer will like to know what they are getting for the purchase consideration including assets and other contracts that the business currently has. The business will have to be professionally valued to come to an agreed price.
Without an agreement, the seller can back out of the sale or quote a value which is higher than the market price. The buyer could also not pay the agreed amount even when the seller has quoted a fair value. The seller could have excluded any litigation the company is facing. When there is a contract, there will be an official evaluation of the business, and the seller will have to declare all present and future liabilities.
Contents of the Transfer of Ownership Agreement – Inclusions
The transfer of the ownership contract template can be used as a reference when deciding the contents of the agreement.
The standard information that should be included in this agreement is:
- The effective date of the agreement
- The names of the parties to the agreement
- The form of business, whether it is a sole proprietorship, partnership or private limited company
- The name of the company registered address and its primary business
- The consideration payable for the business
- Allocation of purchase price: Asset wise details
- Terms of payment
- Adjustments at closing
- Time of closing
- Covenant not to compete
How to Draft the Transfer of Ownership Agreement – Points to Consider While Preparing the Agreement
A transfer of ownership agreement template can be used while preparing an agreement and modifications can be made according to the specific requirements of an agreement.
Here are the points to be considered when drafting an agreement:
- Ensure that the buyer and the seller are competent to contract
- Determine the consideration being paid for the contract by the buyer
- Terms of the contract: The seller should not misinform the buyer
- Confidentiality clause: The parties should not disclose confidential information to third parties
- Dispute resolution clause: Whether arbitration and litigation will be followed
- Termination of contract: The notice period if the contract is to be prematurely terminated
- Governing laws: Jurisdiction of the agreement
- Acceptance of agreement: Offering the agreement to the other party for acceptance
- Space for signatures: Last page for signatures of both parties signifying acceptance of terms
Negotiation Strategy
There will be an offer made by the buyer to the seller under the transfer of ownership agreement. The seller can make a counteroffer and then the two parties need to come to a mutually acceptable price after getting the business properly evaluated in detail by a professional.
Benefits & Drawbacks of the Transfer of Ownership Agreement
The benefits of a transfer of ownership agreement are as under:
- Protection of interest: The interests of both the buyer and the seller are protected by this agreement. The buyer pays the right price considering the value of the business, and the seller gets the fair market price
- Minimizes disputes: As the business is evaluated before the agreement, the buyer is aware of the liabilities of the business and takes an informed decision
- Legal recourse: If any party to the agreement breaches a clause, the injured party can take legal action
Here are the drawbacks of the transfer of ownership agreement:
- No legal remedy: Neither party can seek legal help in case the other party defaults or commits a fraud
What Happens In Case of Violation
In case of violation of a transfer of ownership agreement, there are remedies available to both the buyer and the seller.
- Money Damages: The injured party will receive compensation
- Restitution: The seller has to return the money to the buyer, and the buyer will have to return the business to the seller
- Rescission: Cancelation of contract
- Reformation: A new contract will be drafted
- Specific performance: The parties will have to fulfill their obligations
The buyer and seller in the agreement can refer to a transfer of ownership letter template to find out what terms and conditions can be included.
The buyer and seller in a transfer of ownership agreement need to read the terms and conditions before agreeing. All clauses need to be clearly understood and negotiated to avoid disputes in the future.