Contracts

Contracts are at the heart of any business. Transferring to the purchaser the benefit of the contracts under which the business operates is a fundamental part of a sale of business. These contracts include:

• • contracts with suppliers;
• • contracts with customers; and
• • leases of business premises.

On a sale of business, the benefits of contracts are passed on to the purchaser by:

• • assignment;
• • novation; or
• • sale of shares in the contracting company.

Assignment of contracts by agreement

If the other party to the contract agrees, there is no problem in assigning the contract to the purchaser.

Assignment of contracts without agreement

In many cases, it is not practical to obtain the consent of the other parties to the assignment of each contract to which the business owner is a party for the following reasons:

• • there maybe thousands of contracts, especially customer contracts;
• • it may take too long to obtain the formal consent of each relevant party; or
• • the other party to the contract may not agree.

However, some contracts can be assigned without the other party’s consent:

• • contracts which are not for personal services may be assigned without the consent of the other party, and
• • a contract may have specific terms, allowing assignment.

Novation

Novation occurs pursuant to an agreement between the vendor, the purchaser and the other party to the contract, whereby the old contract is replaced by a new one. The advantages of novation are:

• • from the vendor’s point of view, there is no liability for anything arising after settlement, under the new contract; and
• • from the purchaser’s point of view, there is no liability for anything that occurred under the old contract, before settlement.

Sale of shares in a company

Generally, a contract with a company will remain on foot, and will automatically come under the control of the purchaser of the shares in the company. However, the following issues may arise: