For many founders, selling a business is the culmination of years of work and one of the most significant decisions they will make. Yet most spend far more time building their company than preparing it for sale. How a business is prepared – legally, financially and operationally – can have a significant impact on whether a deal completes, the price achieved and the level of risk the seller carries after completion. Most of the issues we see that cause transactions to stall or collapse could have been addressed well before the sale process began.
In this article, Philip Deja, Partner in the Corporate team, highlights some common mistakes business owners can avoid when preparing for a sale.
When to start preparing your business for sale
In our experience, many owners begin thinking about sale preparation six to twelve months before going to market. In practice, this is often not enough time to address structural issues that may exist within the business.
Common examples include:
- Shares held by the wrong people
- Intellectual property owned personally by the founder rather than by the company
- Undocumented commercial arrangements
- Property occupied without a formal lease
- Informal employment arrangements
None of these are particularly unusual and they are not necessarily deal-breakers, but they are far easier and less costly to resolve before a buyer’s advisers identify them during due diligence.
Identifying and resolving issues early also allows them to be addressed on the seller’s timeline rather than under pressure once a transaction is underway, where they may become leverage for the buyer during negotiations.
Legal advisers should be involved early in the preparation phase alongside corporate finance advisers so that structural and legal issues can be addressed before the business is taken to market.
Due diligence is more than just financials
Owners often focus on headline financial performance when preparing for a sale. Buyers, however, will look beyond this in order to understand the full health of the business and protect themselves from potential future liabilities.
Legal due diligence typically examines:
- Commercial contracts and key customer relationships
- Employment arrangements and people issues
- Intellectual property ownership
- Regulatory compliance
- Title to assets
- Any history of disputes or litigation
For example, buyers will often review whether key customer contracts can be terminated on a change of control, whether intellectual property created by contractors has been properly assigned to the company and whether employment arrangements are documented and compliant.
Issues uncovered during due diligence can affect price, lead to additional conditions or warranties, or in some cases cause a buyer to withdraw from the transaction entirely.
Poorly documented contracts and commercial arrangements
Key customer and supplier relationships that exist informally or on inadequate terms create real risk in a sale.
Change of control clauses, which allow counterparties to terminate or renegotiate contracts if the business is sold, are frequently overlooked until due diligence begins.
Commercial contracts should therefore be reviewed well in advance of a sale process and, where necessary, renegotiated so that important relationships are properly documented and protected.
Unclear ownership of intellectual property
Intellectual property created by employees, contractors or founders, such as branding, trademarks, software, product designs or proprietary processes, is often not properly assigned to the company.
If the core intellectual property of a business sits outside the company and is technically owned by an individual or third party, this can present a significant issue for buyers. In some cases it can lead to renegotiation of the deal or even cause a transaction to fall through.
IP ownership should therefore be reviewed and formalised early, particularly for businesses where brand, technology or proprietary processes form a significant part of the company’s value.
Employment and people issues
Informal arrangements with key staff, undocumented bonus structures and unresolved disputes are commonly uncovered during due diligence.
Buyers will want certainty that key individuals are appropriately contracted and that there are no hidden employment liabilities within the business.
Employment contracts, service agreements for senior staff and any retention arrangements should therefore be reviewed and documented well in advance of a sale.
Reducing key person dependency
Buyers will also assess how dependent the business is on its founder or a small number of individuals.
Where major customer relationships, operational knowledge or strategic decision making sit primarily with the founder, a buyer may perceive greater risk.
Developing a strong management team, formalising key relationships and ensuring that knowledge is embedded within the wider business can significantly strengthen the company’s position in a sale process.
Misunderstanding how the business is valued
Business owners sometimes overestimate value based on revenue rather than maintainable earnings, or fail to account for factors such as customer concentration, key person dependency or potential earn-out structures. Understanding what drives, and what undermines, value allows sellers to address weaknesses and position the business more effectively before going to market.
Leaving the legal structure too late
Whether a transaction proceeds as a share sale or an asset sale can have significant legal and tax consequences for both buyer and seller, including how liabilities transfer and how sale proceeds are taxed.
Pre-sale restructuring, such as separating trading businesses from property holdings, simplifying group structures or resolving connected party arrangements, can take time and may not always be possible at short notice without adverse tax implications.
For this reason, structural decisions are best considered well in advance of a sale with input from both legal and tax advisers.
Underestimating the importance of warranties and disclosure
Many sellers treat warranties as something to deal with at the end of the transaction process. In reality, warranties define the allocation of risk between the buyer and seller after completion.
The disclosure exercise is equally important, as it determines how much of that risk remains with the seller once the transaction has completed.
Poorly prepared disclosure can leave sellers exposed to wider warranty liability after completion, which is why the disclosure letter often deserves as much attention as the purchase agreement itself.
Negotiating heads of terms without legal input
Heads of terms are often presented as non-binding documents, which can lead some sellers to agree them without taking legal advice.
In practice, heads of terms establish the key commercial framework for the deal, including price, structure, exclusivity and conditions. Once agreed, these principles are often difficult to renegotiate later in the process.
Involving legal advisers when heads of terms are being negotiated, rather than after they are signed, can help ensure that the seller’s position is properly protected throughout the transaction.
Conclusion
Most founders we work with describe the sale process as more demanding than they expected. The ones who found it least so were almost always the ones who started preparing earliest. If you are considering selling your business and would like to discuss your options, please get in touch with our Corporate team.
