Hello Tobi and thank you for your question.
You are correct. When the electricity is cut off during a power failure, the transfer switch has no power from the utility line. After 20 seconds (the time is preset at the factory), the generator will supply power to your home.
When the external power (from the utility company) is restored for more than 5 minutes, the transfer switch senses that power has been restored. The generator will cool down and shut off. The power company then provides the power to your home.
The manual has more detailed information and can be found here: http://bsintek.basco.com/BriggsDocu...
Best wishes on your project!