A sell-on clause is a contractual provision established during the sale of an asset, which grants the original seller a predetermined right to a portion of the proceeds from any subsequent resale. This mechanism allows the seller to participate financially in the asset’s future value appreciation after they have relinquished ownership. By including this term in the original sales agreement, the seller secures a financial interest that extends beyond the immediate transaction.
The Mechanics of the Sell-On Clause
The operation of a sell-on clause is activated by a specific trigger event: the subsequent sale of the asset to a third party. Calculating the payout requires defining three variables established in the initial contract: the original price paid, the price achieved in the subsequent sale, and the agreed-upon percentage rate. The calculation begins only after the asset changes hands for a second time.
The contract must clearly define the basis for the calculation, typically falling into two categories: gross revenue or net profit. A gross revenue clause is simpler, applying the percentage directly to the resale price or the profit margin (resale price minus the original price). This method offers the highest payout to the original seller because it does not account for the buyer’s intervening costs.
A net profit clause is significantly more complex, requiring the contract to meticulously define all allowable deductions the current owner can claim against the resale price. These deductions might include costs related to maintenance, development, or improvements made to the asset during the holding period. Contractual disputes often arise from ambiguity regarding which expenses are legitimately deductible. Establishing these terms precisely at the outset is necessary to ensure a smooth calculation when the trigger event occurs.
Strategic Reasons for Including a Sell-On Clause
For the selling party, the inclusion of a sell-on clause serves as risk mitigation when they believe the asset holds significant unrealized value. If the seller suspects the current market valuation is low or anticipates substantial appreciation, the clause ensures they capture a portion of that future growth. This is relevant when the seller needs to liquidate the asset quickly but wants to retain rights to its long-term potential.
The clause also offers benefits to the purchasing party, often serving as a tool to lower the immediate purchase price. By agreeing to share future profits, the buyer can reduce the upfront capital outlay required for the acquisition. This structure transforms a portion of the purchase price from a fixed immediate cost into a contingent deferred payment, aligning the financial interests of both parties.
Key Variations in Clause Structure
Sell-on clauses are not uniform and can be customized with several structural limitations to manage future liability. A common modification is a sunset clause, which stipulates an expiration date or specific time frame after which the sell-on obligation ceases. This gives the buyer certainty that their future resale profits will eventually be entirely their own after a defined period, such as five or seven years.
Contracts may also include financial caps, setting a maximum aggregate payout the original seller can receive, regardless of the final resale price. Conversely, a sliding scale structure adjusts the percentage rate based on the profit achieved from the subsequent sale. For instance, the seller might receive 10% of the first $5 million in profit but only 5% of any profit exceeding that threshold. Agreements occasionally incorporate non-monetary triggers, linking the payout to specific performance milestones or asset development goals.
Where Sell-On Clauses Are Most Common
The most prominent application of the sell-on clause is found in the transfer market of professional sports, particularly global football (soccer). Clubs frequently use this mechanism when selling younger players who have high potential but are not yet proven at the senior level. The selling club, which invested resources into the player’s development, secures a return on that training if the player’s value increases substantially at the purchasing club.
These clauses often range from 10% to 25% of the future profit and are a standard feature in high-profile international transfers. A small club selling a promising academy product may receive a modest initial fee, but the sell-on clause ensures a significant windfall years later if that player is sold for a much larger sum. This provision acts as a financial safeguard for smaller developmental clubs.
Beyond sports, sell-on clauses are utilized in the licensing and sale of intellectual property, such as patents or software. A technology creator selling patent rights might demand a percentage of future revenue if the buyer sells the patent to a larger entity.
In corporate mergers and acquisitions, a seller of a smaller company might agree to a lower immediate valuation in exchange for a percentage of the proceeds if the acquiring company sells the division within a few years. Real estate developers also use these clauses when selling undeveloped land, securing a right to a portion of the profit generated once the land is successfully improved and resold.
Potential Risks and Contractual Disputes
The complexity inherent in sell-on clauses makes them susceptible to contractual disputes and legal challenges. A primary point of contention revolves around the accurate valuation of the asset, especially when the clause is based on net profit. Buyers may attempt to inflate allowable deductions, creatively defining development or maintenance costs to minimize the resulting profit calculation.
Another risk is the non-disclosure of the subsequent sale price, where the current owner may attempt to obscure the true value of the transaction to avoid or reduce the payout. To prevent breaches, these clauses require meticulous legal drafting that anticipates potential loopholes. Clear contractual language specifying audit rights and precise definitions of all financial terms is necessary to ensure the clause is enforceable.