Q:My agencys three most
valuable contracts are our GDS agreement, major airline override
agreement and office lease. If we sell our agency to a larger one,
will the buyer automatically get the benefit of these contracts? If
not, should we delay closing the acquisition until the vendor,
airline, and landlord agree to let the buyer take over the
contracts?
A:
The typical travel agency sale takes the form of a sale of the
travel agencys assets. The seller corporation transfers its assets
to the buyer corporation, in return for money. The assets include
not only tangible (i.e., touchable) things such as desks and files,
but also intangible (i.e., invisible) things such as client
relationships, which are known as goodwill. Another intangible
asset that is usually sold is the sellers rights to the contracts
that you mention, which I will call your supplier
contracts.
Here is the catch:
Even though your agreement with the buyer (acquisition agreement)
may state that you are selling your supplier contract rights, the
acquisition agreement doesnt automatically transfer your supplier
contracts as far as the suppliers are concerned. To finish the
transfer process, you need to get the supplier to recognize the
buyer as a party to the contract.
The process of
getting the supplier to recognize the buyer is called the
assignment of the contract. In connection with an asset sale, there
are two ways to accomplish an assignment. For less-important
contracts, such as leases of office machines, maintenance
agreements, ordinary travel supplier agreements, and probably most
group and incentive contracts, you can usually accomplish
assignments informally after the sale of your agency. Therefore,
while these assignments are not exactly automatic in connection
with an asset sale, they raise problems so rarely that you can
consider them nearly so.
On the other hand,
you will almost always need a formal assignment of the important
contracts that you mention. A formal assignment means an amendment
to the contract that adds the buyer as a party in place of or in
addition to you. In most cases, the seller needs to take the
initiative to contact the supplier to ask for the suppliers consent
to a formal assignment.
Suppliers will
always tell you that you need their consent before you close on the
sale of your business. Indeed, most long-term contracts prohibit
you from assigning them without the suppliers written consent.
However, keep in mind that having to obtain these consents can
delay closing and can give the supplier a lot of leverage to change
the deal as a condition for consenting to the
assignment.
Therefore, you need
to make a judgment call about whether you seek a formal assignment
before closing. You need to consider whether the contract is
currently so favorable to you that the supplier would use the
process as an opportunity to terminate the contract if you breach
it by closing on the sale without the suppliers consent. You also
need to consider whether the buyer has enough clout to persuade the
supplier to consent to assignment even if the supplier may not want
to do so.
Dont make the
assumption that all of your important contracts will transfer. You
need to think carefully and develop a strategy covering when and
how to assign each one.
Mark Pestronk
is a Washington-based attorney specializing in travel law. He
answers your questions in the TravelWeekly.com Legal Ease forum. To contact Pestronk
directly, e-mail him at [email protected].