Key Takeaways

  • Selling a business contract involves legal, financial, and operational considerations that can expose sellers to liability.
  • Consent from original parties and compliance with contract terms are essential for a valid transfer.
  • Common issues include successor liability, ineligibility of new parties, and enforcement of penalty clauses.
  • Purchase agreements should detail assets, liabilities, and contingencies for smoother transactions.
  • Legal counsel is highly recommended to navigate contract terms, due diligence, and regulatory compliance.

Contract selling refers to the process of selling a business agreement. For the parties involved, failure to fulfill the terms of the contract can lead to penalties and liabilities to defaulters.

Business Contracts

A business contract operates in a way similar to other types of agreements. It legally binds all parties to the terms and conditions of the document. It can be a bit difficult to sell a business document after all parties have agreed on the terms as they may need to renegotiate costs and parties that want to pull out might be penalized. Parties who fail to fulfill their obligations to the terms of the contract risk huge civil liabilities.

The Interest of Original Parties

One of the challenges you can encounter when selling a business contract is that the interest of the original parties to the agreement may not align with your intention to sell the original business contract to a new agent or small business. The reason for this is that you signed the contract with the old parties as a small business owner and the terms of the agreement will change if you sell it to another party.

The problem with this arrangement is that you can still be held responsible for the terms of the contract since the original parties consider you to be legally bound by it. The only way to escape liability is to seek permission from the original parties to sell the agreement to a new owner.

Steps to Sell a Business Contract Successfully

Selling a business contract requires more than simply finding a buyer. It involves a multi-step legal and procedural process to ensure the rights and obligations of all parties are preserved. Here’s a breakdown of essential steps to follow:

  1. Review the Original Contract
    Check for assignment clauses that prohibit or allow the transfer of rights and obligations. Some agreements require prior written consent from all original parties.
  2. Get Consent from All Involved Parties
    If the contract is assignable, you may still need formal approval from other signatories. Always document this consent in writing.
  3. Perform Due Diligence on the New Party
    Ensure the potential buyer meets all qualifications outlined in the contract, such as licenses, creditworthiness, or service capacity.
  4. Draft an Assignment Agreement
    This legal document transfers rights and obligations to the new party and may limit your future liability.
  5. Notify Stakeholders
    Customers, suppliers, and employees may be affected by the transfer. Inform them promptly and clearly.
  6. Close the Transaction
    Execute all necessary documentation, including the assignment, amendment (if needed), and updated payment arrangements.
  7. Retain Legal and Financial Records
    Maintain a paper trail of all communications, approvals, and legal documents in case of future disputes or audits.

Penalty Clauses and Fees>

The wordings of your business contract are extremely important. The agreement may include terms that stipulate penalties if you transfer ownership of the contract. The penalty is meant to compensate the old parties for the trouble of creating new contracts with a new business and documentation.

Ineligible Contract Parties

Before transferring ownership of an existing business contract to another owner or vendor, it's important to determine whether the new party is legally eligible to enter into the agreement. The terms of your contract may stipulate that only parties with specific credit ratings, licenses, permits, or certifications to provide skilled labor can buy the agreement. If you sell the contract to a party that does not satisfy these terms, you may be legally responsible for any problems resulting from the misconduct of the ineligible party regarding the contract.

Asset Sale vs. Contract Sale

When selling a business, it's important to distinguish between an asset sale and a contract sale. In an asset sale, specific assets—like contracts, inventory, and equipment—are sold. A contract sale, however, involves transferring the obligations and benefits of an ongoing agreement. Key distinctions include:

  • Consent Requirements: Asset sales might require fewer consents, whereas contract sales usually require formal approvals from the other contract parties.
  • Liability: The seller may remain liable unless the contract explicitly releases them post-assignment.
  • Structure: Contract sales are often embedded within asset purchase agreements or business purchase agreements to ensure continuity.

Liability and Negligence

For the duration of the contract, you must maintain your obligations regarding a business contract. If you choose to become negligent about your duties to cajole your business partners to let you sell the contract to another business or vendor, your business will be exposed to civil liability.

If you become negligent in upholding your side of the contract, your business partners can file a lawsuit against your small business claiming damages for losses incurred as a result of your negligence. Depending on the liability protection offered by your business, business partners may also go after your possessions.

Drafting a Business Purchase Agreement

When selling a business contract as part of a broader business sale, the business purchase agreement (BPA) plays a central role. It outlines the terms of the sale and mitigates legal risks. Elements typically included:

  • Purchase Price and Payment Terms
    Defines the total value, payment structure (lump sum vs. installments), and adjustments for inventory or receivables.
  • Assets and Liabilities Transferred
    Clarifies which contracts, licenses, debts, and obligations are included or excluded from the sale.
  • Contingencies and Representations
    Addresses conditions that must be met before closing and representations each party makes about their authority, finances, and disclosures.
  • Indemnification and Liability
    Provides protections if one party breaches the agreement or if liabilities emerge after closing.
  • Non-Compete or Confidentiality Clauses
    Protects buyer interests by restricting the seller’s future business activities or disclosures.

Properly written, a BPA can reduce confusion and ensure both parties understand their rights and duties.

Frequently Asked Questions

  1. Can I sell a business contract without the other party's consent?
    In most cases, no. Many contracts include anti-assignment clauses, requiring consent before transferring obligations.
  2. What happens if the buyer violates the contract after transfer?
    Unless your contract includes a release of liability, you could be held liable for the new party’s breach.
  3. How do I know if a contract is assignable?
    Check the assignment clause in the contract. If it’s silent or vague, legal advice is essential.
  4. Is a contract sale the same as selling a business?
    No. A contract sale involves transferring a specific agreement, whereas selling a business includes assets, liabilities, and operations.
  5. Do I need a lawyer to sell a business contract?
    While not legally required, working with a lawyer helps ensure compliance, reduces risks, and clarifies obligations for all parties.

If you need more information about selling a business contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.