Partial Business Transfer Agreement

SHORT ANSWER TO THE MAIN QUESTION

Under Czech law, a business (obchodní závod) is understood as an organised set of assets and liabilities created by an entrepreneur for the operation of their business activity.

In a transfer of a business, the buyer generally acquires everything belonging to the business as an organised whole. Individual items may be excluded, provided that the transferred unit does not lose its character as a business.

The transaction may therefore include not only tangible assets and other property rights, but also receivables, debts, contractual relationships and, subject to the statutory conditions, employment relationships.

The agreement therefore needs to answer not only “what am I buying?”, but also “what functioning business unit am I taking over and which legal relationships continue with it?”

YOU MAY BE THINKING…

“Is a business transfer the same as selling a company?”

“Do we have to list every computer and every receivable?”

“Do debts automatically transfer to the buyer?”

“What if the buyer did not know about a particular liability?”

“Do customers have to consent to the transfer of contracts?”

“What happens to employees?”

“Can we transfer only one branch?”

“And when is it no longer a transfer of part of a business, but simply a sale of selected assets?”

That last question is often one of the most important issues in transactions described as a “transfer of part of a business”.

THE REAL PROBLEM IN PRACTICE: THEORY VS REALITY

On paper, the transaction may look simple.

The seller owns a business.

The buyer takes it over.

The buyer pays the price.

The business continues.

But a business is not a warehouse full of items.

Under Czech law, it is treated as an organised set of assets and liabilities serving a business activity.

Take, for example, a café operation.

Its value does not consist only of:

• the coffee machine,
• furniture,
• stock,
• the point-of-sale system.

It may also include:

• the lease of the premises,
• employees,
• supplier relationships,
• an ordering system,
• a customer database,
• the domain,
• social media accounts,
• know-how,
• receivables,
• certain debts,
• permits or licences, although their transferability must always be reviewed separately.

If you sell only the tables, coffee machine and stock, you have not necessarily transferred the business.

If, on the other hand, you transfer a functioning unit that can essentially continue operating, the applicable legal regime may be completely different.

The difference between an asset deal and a business transfer is not merely the title of the agreement. It may determine what legally transfers together with the assets.

BIGGEST RISKS AND COMMON MISTAKES

With a transfer of a business or part of a business, I would pay particular attention to:

• incorrectly defining what is actually being transferred,
• confusing a business with a collection of individual assets,
• vague definition of the transferred part of the business,
• failure to carry out proper legal and financial due diligence,
• unknown or disputed debts,
• uncollectible receivables,
• contracts containing transfer restrictions or change-of-control provisions,
• missing third-party consents,
• leases that have not been properly reviewed,
• licences and other rights that may not be automatically transferable,
• unclear ownership of intellectual property,
• inadequate treatment of employees,
• unclear stock and work in progress,
• a poorly defined effective date,
• changes in the business between signing and actual transfer,
• no purchase-price adjustment mechanism,
• inadequate representations and warranties by the seller,
• hidden liabilities,
• no contractual consequences for inaccurate warranties,
• missing corporate approvals where required.

A typical mistake?

“We’ll just write that the buyer assumes all liabilities, and that solves it.”

It does not.

You need to know what liabilities actually exist, which of them legally transfer, what the position of creditors is, and who ultimately bears the economic consequences if something emerges after closing that the buyer did not know about.

HOW TO APPROACH IT: REALITY, NOT THEORY

With a business transfer, I would never start by drafting the agreement.

I would start with the question:

What exactly is the functioning business unit that should move to the buyer and continue operating after the transaction?

1. Define the business or the part being transferred

The entire business?

One branch?

One manufacturing division?

A separate product line?

A specific service segment?

With a transfer of part of a business, the definition must be especially careful.

A part of a business cannot simply be any selected group of important assets. It must itself have the character of an organised and sufficiently independent unit.

2. Inventory what actually belongs to the transferred unit

Assets.

Receivables.

Debts.

Contracts.

Employees.

Software.

Licences.

Intellectual property.

Domains.

Data.

Leased assets.

Work in progress.

Litigation.

Warranties.

Regulatory authorisations.

A Business Transfer Agreement can only be as good as your understanding of the business being transferred.

3. Review debts and receivables

Under Czech law, a transfer of a business generally involves the buyer becoming creditor of the receivables and debtor of the liabilities belonging to the business, subject to the statutory rules, including the buyer’s knowledge of certain liabilities.

The law also protects creditors in specific situations, including rules on the seller’s continuing liability where a creditor does not consent to the transfer of a debt.

In practice, a table saying:

“Assets CZK 20 million, liabilities CZK 5 million”

is not enough.

You need to understand what those five million actually consist of.

4. Review contracts and third-party rights

For each material contract, you should check:

• whether it is transferable,
• whether it contains an assignment restriction,
• whether consent is required,
• whether it contains a change-of-control or similar clause,
• whether the counterparty must be informed,
• whether the transfer affects the counterparty’s legal position.

5. Address employees early

A transfer of a business may result in the transfer of rights and obligations arising from employment relationships to the new employer.

Czech labour law also imposes information and consultation duties towards trade unions, employee councils or the affected employees themselves.

Employees should therefore not be treated as the last item on the closing checklist.

6. Structure the purchase price and adjustments

Is the price fixed?

Is it based on accounting figures?

Will it change depending on stock, receivables, cash or debt at closing?

Czech law contains default rules that may apply, but in a significant transaction I would not leave the purchase-price mechanics solely to statutory defaults.

7. Separate signing and closing

The agreement may be signed today.

The business may be transferred a month later.

During that period, the agreement should determine:

• how the seller must operate the business,
• whether new material obligations may be assumed,
• whether significant assets may be sold,
• what information must be provided to the buyer,
• which conditions must be satisfied,
• what happens if they are not.

PRACTICAL EXAMPLES

👉 The buyer acquires an e-commerce business “with everything”

The purchase price reflects a functioning online business with an established customer base.

After signing, it turns out that:

the domain is registered in the managing director’s personal name,

the software belongs to an external developer,

part of the customer database cannot be used in the way the buyer expected,

and a key distribution agreement contains transfer restrictions.

The buyer was not buying servers.

The buyer was buying a functioning business model.

If its key components do not transfer, the economic purpose of the transaction may disappear.

👉 One division is being sold

A company operates three different business activities.

It wants to sell one of them.

At first sight, simple.

But accounting, employees, software, warehouse space and several supplier agreements are shared by all three divisions.

The question then becomes:

Does a sufficiently independent part of the business actually exist that can be transferred as a functioning organisational unit?

Or does it first need to be separated before the transaction?

👉 An old problem appears after closing

The buyer takes over a functioning business.

Three months later, a major customer complains about work performed before the transfer.

The customer claims substantial damages.

Only now does it become crucial to determine:

What belonged to the transferred business?

Who is legally liable towards the customer?

And who should ultimately bear the economic burden between the seller and the buyer under the transfer agreement?

Legal liability towards a third party and the contractual allocation of economic risk between the transaction parties are not always the same thing.

WHY YOU SHOULD BE CAREFUL WITH “I’LL DO IT MYSELF”

A Business Transfer Agreement is not a contract where you can simply download a template and fill in:

Seller.

Buyer.

Price.

Date.

The subject of the transaction is not one asset.

It is a network of assets, liabilities and relationships that should continue to operate after the transfer.

A template does not know:

• how your business actually works,
• which contracts are essential,
• what is owned and what is leased,
• who owns the software,
• who controls the domains,
• what debts exist,
• which receivables are disputed,
• which employees belong to the transferred part,
• whether third-party consents are needed,
• which licences are transferable,
• what happens to ongoing projects,
• what happens to historic customer claims,
• who bears historic tax and other risks,
• how the purchase price should be adjusted.

Most importantly:

A Business Transfer Agreement cannot repair a badly prepared transaction.

If, before signing, you do not know what exactly the buyer is acquiring, the problem is not merely in the contract.

The problem is in the transaction itself.

LAWYER’S RECOMMENDATION + CHECKLIST

For a business transfer, I use one simple mental test:

If the seller completely disappeared the day after closing, would the buyer genuinely have everything necessary to continue operating the transferred business?

If not, you need to find out what is missing.

Quick checklist

• The transferred business or part of the business is clearly defined.

• The organisational independence of any transferred part has been verified.

• A list of material assets has been prepared.

• Receivables have been reviewed.

• Debts have been reviewed.

• Key contracts have been identified.

• Their transferability has been checked.

• Necessary third-party consents have been obtained.

• Lease relationships have been reviewed.

• Intellectual property has been addressed.

• Licences and permits have been reviewed.

• Software, domains and data have been addressed.

• Affected employees have been identified.

• Employment-law information duties have been fulfilled.

• Work in progress has been addressed.

• Litigation and customer claims have been identified.

• The purchase price has been structured.

• A purchase-price adjustment mechanism exists where needed.

• The effective transfer date is defined.

• The period between signing and closing is regulated.

• Seller representations and warranties are included.

• Consequences of inaccurate warranties are defined.

• Handover of documentation and access credentials is addressed.

• Any transitional assistance by the seller is regulated.

• Necessary corporate approvals and registrations have been reviewed.

FAQ

What is a business under Czech law?

Under the Czech Civil Code, a business (obchodní závod) is an organised set of assets and liabilities created by an entrepreneur for the operation of their business activity.

Czech law also presumes that the business includes everything that typically serves its operation.

Is a business transfer the same as an asset sale?

No.

In an asset sale, specific individual assets or rights are transferred.

In a business transfer, the subject of the transaction is an organised business unit, and Czech law attaches special consequences to the transfer of its components and legal relationships.

Can certain items be excluded from the transfer?

Yes.

The parties may exclude particular items, provided that the transferred unit does not lose its character as a business.

The more essential items you exclude, however, the more carefully you need to assess whether you are still transferring a business at all.

What is a transfer of part of a business?

It is not simply the transfer of any selected part of an entrepreneur’s assets.

The transferred part must itself constitute an organised and sufficiently independent business unit.

Do debts transfer with the business?

Czech law provides a special regime under which the buyer becomes debtor of liabilities belonging to the business, subject to statutory conditions including the buyer’s knowledge or what the buyer could reasonably have anticipated.

Czech law also contains creditor-protection rules, including the seller’s continuing liability in certain situations.

What happens to employees?

A business transfer may lead to the automatic transfer of rights and obligations arising from employment relationships to the acquiring employer.

Before the transfer, statutory information and consultation obligations towards employees or their representatives may also apply.