This type of transaction is common in sectors such as hospitality, commerce and services and allows the acquirer to continue the business without having to start from scratch.
The transfer usually includes both the transfer of the premises in which the business operates and the transfer of goods, equipment, licences and, in some cases, the customer portfolio.
1. WHAT IS THE TRANSFER OF A BUSINESS?
A transfer of a business is an agreement whereby the owner or proprietor of a business transfers the rights to operate the business to another person or entity who takes over the management and operation of the business.
In return for this transfer, the owner receives financial consideration.
Although sometimes confused with the sale of a business, the transfer does not necessarily involve the sale of the ownership of the business, but rather refers to the transfer of the commercial operation of the existing business.
It is important to note that in many cases the transfer includes not only the furniture, goods and licences necessary for the operation of the business, but also the lease of the premises in which the business is carried on. This is particularly relevant for businesses where the physical location has a significant value, such as restaurants, bars, shops or hairdressers.
2. ELEMENTS OF THE TRANSFER OF A BUSINESS
a) Transfer of the lease
In many cases, the transfer will include the assignment of the lease of the premises in which the business operates. This is particularly relevant in situations where the business is highly location-dependent. In this type of transfer, the new owner assumes the rights and obligations of the original lessee, while maintaining the terms of the lease, such as the amount of rent and the term of the lease.
It is important that the landlord of the premises authorises the assignment of the lease, as many leases contain a clause requiring the landlord’s consent for the transfer to take place.
b) Inventory and business assets
The transfer of a business includes the inventory of goods and assets necessary for the operation of the business. This may include machinery, furniture, technological equipment, goods, business licences and, in some cases, intellectual property or trade marks.
A detailed inventory of the assets included in the transfer is essential to avoid misunderstandings between the parties.
c) Customer base and goodwill
In some cases, the transfer will include the customer base and goodwill, allowing the new owner to benefit from the reputation and clientele of the existing business.
This is particularly important in businesses where customer relationships or branding is a key asset, such as restaurants, speciality shops or professional services.
d) Licences and permits
In order for the new owner to continue the business, it is essential that the necessary licences and permits are transferred to the new owner.
These may include business licences, health permits, local authority permits, etc.
In many cases, the validity of these permits is conditional on the new owner meeting certain requirements, which may involve additional formalities.
3. REQUIREMENTS FOR THE TRANSFER OF BUSINESS PREMISES
Article 32 of the current Law on Urban Leases sets out the requirements for the transfer of business premises as follows:
- If a commercial or professional activity is carried out in the leased property, the lessee may sublet the property or assign the lease without the consent of the lessor.
- The lessor is entitled to a rent increase of 10 per cent of the current rent in the case of partial subletting and 20 per cent in the case of assignment of the lease or total subletting of the leased property.
- A change in the person of the lessee as a result of a merger, transformation or demerger of the lessee company shall not be regarded as a transfer, but the lessor shall be entitled to the rent increase provided for in the previous paragraph.
- Both the assignment and the subletting must be notified to the lessor in an irrefutable manner within a period of one month after they have been concluded.
4. PROCEDURE FOR THE TRANSFER OF AN ESTABLISHMENT
The process of transferring a business requires the fulfilment of certain steps in order to be legally valid and effective:
a) Negotiation and initial agreement
The first step is the negotiation between the current business owner and the person interested in acquiring the business. At this stage, key issues such as the transfer price, the assets to be included, the assignment of the lease, outstanding debts and any other relevant terms are discussed.
b) Transfer agreement
Once an agreement has been reached, it is formalised in a transfer agreement. This document details all the terms of the agreement, including:
- The price of the transfer.
- Goods and assets included (equipment, furniture, merchandise, licences).
- Assignment of the lease of the premises.
- Liability for outstanding debts (if any).
- Terms and method of payment.
This contract must be signed by both parties and in some cases it is advisable to have it checked by a lawyer to ensure that it complies with all legal requirements.
c) Landlord’s permission
If the business is located in rented premises, the landlord will need to consent to the assignment of the lease to the new owner, if this is provided for in the existing lease.
In many leases, this assignment is subject to the consent of the landlord, who may or may not consent to the transaction, depending on the terms of the lease.
d) Change of ownership of licences and permits
The new business owner will need to arrange a change of ownership of the licences and permits associated with the business.
Depending on the nature of the business, this may involve dealing with local authority, health or trade bodies.
It is important to ensure that all necessary permits are up to date to avoid legal problems later on.
5. ADVANTAGES AND DISADVANTAGES OF TRANSFERRING A BUSINESS
a) Advantages
– Established business
The main advantage for the transferee is that he does not have to start from scratch.
He receives a functioning business with a portfolio of customers, infrastructure, licences and, in many cases, a good reputation.– Reduced upfront costs
Although there are costs associated with the transfer, they can be less expensive than starting a new business from scratch, especially when taking into account the time and effort required to build a customer base.– Strategic location
Many transfers include well-located premises, which can be crucial to the success of the business, particularly in high-demand areas.
b) Disadvantages
– Hidden debts or problems
In some cases, the business may have debts or legal problems that are not apparent at the time of the transfer.
It is essential to carry out due diligence with a solicitor to identify any hidden risks.– Lease renewals
The lease may be coming to an end and the new owner may need to renegotiate with the lessor, possibly on less favourable terms.– Obsolescence of equipment
Assets included in the transfer (machinery, furniture, technology) may be in poor condition or in need of refurbishment, resulting in additional costs.
6. LEGAL ASPECTS TO BE CONSIDERED IN THE TRANSFER OF THE BUSINESS
– Due Diligence
Before finalising the transfer, the buyer should carry out a thorough investigation of the financial and legal status of the business.
This includes checking the accounts, any debts, contracts with suppliers, lease status and any necessary licences.
– Taxation issues
The transfer of a business may be subject to taxation, depending on the jurisdiction.
In many cases, taxes are levied on the value of the transfer and the acquirer must take these tax liabilities into account when calculating the total cost of the transaction.
– Protection against fraud
It is essential to have a well-drafted transfer agreement setting out all the terms of the agreement, preferably with the assistance of a solicitor.
7. CONCLUSION
Transferring a business is an attractive option for those who wish to start a business without having to start from scratch, as it allows them to continue with an established operation, with customers, infrastructure and licences.
However, it is an operation that requires careful planning, due diligence and review of legal and financial aspects to ensure that the transfer is beneficial and does not create hidden risks for the new owner.
At Quikprokuo, we take care of the advice, guidance and handling of the entire business transfer process to ensure that our clients are protected in the process and to increase the profitability of the business.
Contact us to start the process.
