Navigating the legal maze: Five common pitfalls in business sales

2nd February 2024

Business sales can be an exciting experience, but they certainly aren’t without their pitfalls.

Whether you are an experienced entrepreneur or a first-time seller, the process of exiting your business can be complex. It’s often daunting and fraught with legal intricacies that can derail even the most straightforward deals.

Beyond the loss of a sale, without the right protections and considerations in case, a poorly managed deal can result in long-term damage to your commercial success.

Awareness and understanding of these pitfalls are crucial for any business owner considering a sale.

Based on our considerable experience assisting in a range of complex, multinational transactions, our knowledgeable Corporate Law team have put together five common legal pitfalls encountered during business sales, with advice on how to navigate them successfully.

  1. Timely tax planning

It is never too early to be thinking about selling your business. In fact, an exit strategy should be one of the first things you think about when setting out on your new venture.

Timely tax planning can be one of the most effective ways to increase the net proceeds of your sale. Some tax reliefs need to be put in place at least two years in advance of a disposal so do not leave this thought process until the last minute.

Engaging an experienced tax and legal advisor can ensure that your tax position is properly considered and implemented in good time for your sale, significantly reducing the tax you may need to pay.

  1. Inadequate preparation and due diligence

One of the most significant missteps in selling a business is entering the market unprepared. This includes a lack of preparation in readiness for a thorough due diligence process, which can lead to delays, costs and unexpected legal complications.

Sellers are well advised to ensure all business records are up to date, accurate and complete, and legal compliances are up to date, contracts are properly documented, as well as plotting out ongoing obligations and relationships that are essential to the ongoing success of the business.

This preparation includes legal reviews, financial audits, assessing contracts, addressing any compliance issues and resolving any existing disputes. Failure to do so can result in, delays, additional costs, reduced valuation or even deal termination.

  1. Neglecting confidentiality agreements

The importance of confidentiality in business transactions cannot be overstated. Revealing too much information without proper safeguards can jeopardise the sale and commercial effectiveness of all parties involved.

Most transactions include the disclosure of sensitive information so sellers should secure Non-Disclosure Agreements (NDAs) before disclosing any details.

This measure protects the business’s proprietary information and maintains its market value during negotiations – especially where a deal fails to materialise.

  1. Misunderstanding asset v.s. share sales

The decision between an asset sale and a share sale has significant legal and tax implications. In an asset sale, the buyer typically acquires specific assets and liabilities, whereas, in a share sale, they purchase the entire company, including all of its assets and more importantly, its liabilities (current and historical).

Deal structure is often tax driven, with buyer and sellers having competing interests. While owners should always try to seek terms that best suit their requirements, the nature of some sales may be dictated by the needs of buyers or the best path for the future of the business and tax efficiencies.

There are subtle but significant nuances between these two approaches, leading to unexpected legal and financial consequences if not properly advised from the outset.

For example, when a buyer opts for a share sale, they generally face higher risks compared to an asset sale due to the potential liabilities they might inherit.

Consequently, the buyer often requests that the seller provides more comprehensive warranties and indemnities to safeguard against any unforeseen liabilities.

It’s crucial to consult with legal and financial advisors to understand the implications of a particular structure and determine the most beneficial and viable option for you as a seller.

  1. Inadequate legal representation and advice

Attempting to navigate a business sale without professional legal advice is very risky.

The complexities of selling a business require expertise that only experienced legal professionals can provide and ideally with professionals who have worked on deals of a similar scale and nature previously.

The value that can be gained from engaging with experienced legal professionals cannot be understated, and it is best to seek referrals when choosing your legal team to ensure that they are up to the task. Engaging legal representation as early as possible in the process (even whilst preparing your business for sale) can add significant value to your transaction.

For example, if you are seeking cross-border business sales, it can be important to instruct solicitors with international outreach and expertise, as they will have a greater appreciation of the intricacies involved in multi-national deals.

Inadequate legal representation can result in a seller not fully understanding the nature of the deal, taking unreasonable or unnecessary risks, overlooking important details, compliance issues, and contractual pitfalls. Engaging a skilled legal team ensures that the seller’s interests are protected throughout the process.

Selling a business is a multifaceted process that demands careful consideration of various legal aspects.

By being aware of these common pitfalls, only some of which we have outlined above, sellers can avoid costly mistakes.

In the complex world of business transactions, being forewarned is being forearmed, so seek the proper legal advice from our experts early on. To find out more about our services, please contact our team.