Selling your business can be an exciting experience, but it certainly isn’t without its 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.
- 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 thorough due diligence, which can lead to unexpected legal complications.
Sellers must ensure all business records are accurate and complete, and legal compliances are up to date, as well as plotting out ongoing obligations and relationships that are essential to the ongoing success of the venture.
This preparation includes financial audits, assessing contracts, and resolving any existing legal disputes. Failure to do so can result in reduced valuation or even deal termination.
- 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.
- 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 liabilities.
For those uninitiated with deals, it can be easy to assume that the sale will go one way and in line with their aspirations – especially where a sale forms part of their retirement plans.
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.
Sellers often misunderstand the nuances between these two approaches, leading to unexpected legal and financial consequences.
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 anticipates that the seller will provide comprehensive warranties and indemnities to safeguard against any unforeseen liabilities.
It’s crucial to consult with legal and financial advisors to determine the most beneficial and viable option.
- Ignoring post-sale liabilities and obligations
Sellers often underestimate the importance of post-sale liabilities and obligations. This oversight includes warranties, indemnities, and potential earn-out arrangements.
A lack of clarity in these areas can lead to post-sale disputes and legal challenges. Sellers must clearly understand and negotiate these terms to avoid future liabilities.
- Inadequate legal representation and advice
Attempting to navigate a business sale without professional legal advice is risky.
The complexities of commercial law 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 importance of experience cannot be understated, and it is best to seek referrals when choosing your legal team to ensure that they are up to the task.
For example, if you are seeking a cross-border transaction, 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 overlooked 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.