Selling a business is rarely something that happens overnight. For many owners, the company represents years of work, investment and decision-making, so preparing properly before a buyer begins due diligence can make a significant difference to how smoothly the process moves.
A buyer will usually want to understand how the business is structured, what contracts are in place, who owns the shares and assets, whether there are unresolved disputes and if the company has kept its legal and statutory records up to date. Addressing these areas early can help reduce delays and make it easier to answer questions once negotiations begin.
Start with the company structure
One of the first areas to review is the legal structure of the business. This includes confirming the current shareholders, directors and ownership percentages, as well as checking that Companies House filings and the company’s internal records reflect the actual position.
If shares have changed hands informally, a director has left but the records were never updated, or the company has operated under arrangements that were never properly documented, those issues may need to be resolved before a sale progresses.
Check shareholder and director arrangements
Shareholder agreements, articles of association and board records can become important during a sale. A prospective buyer may want to know who has authority to approve the transaction and whether any shareholder has rights that could affect the sale.
It is also sensible to review any historic loans, director loan accounts, dividend arrangements or informal agreements between shareholders. Matters that seem routine internally can become significant questions during due diligence.
Review your key commercial contracts
Contracts are often central to the value of a business. Customer agreements, supplier terms, leases, finance arrangements and service contracts should be reviewed before they are disclosed to a buyer.
Particular attention should be paid to clauses dealing with termination, renewal, exclusivity, liability and a change of ownership. Some agreements may give the other party a right to terminate or require consent if control of the company changes.
- Major customer and supplier agreements
- Commercial leases and property licences
- Finance, loan and asset purchase agreements
- Software, technology and intellectual property licences
- Distribution, agency or franchise agreements
- Contracts with consultants and key service providers
Make sure intellectual property is owned by the business
Brand names, logos, websites, software, written content, designs and other intellectual property can form an important part of a company’s value. Before a sale, it is worth checking that the business actually owns or has the necessary rights to use these assets.
Problems sometimes arise where a founder, freelancer or external developer created something for the company without a clear written transfer of ownership. Buyers may ask for evidence that important intellectual property belongs to the business being sold.
Employment records and key staff
Employees can be another major part of due diligence. Employment contracts, staff handbooks, bonus arrangements and details of ongoing grievances or disputes should be organised and reviewed.
If the buyer is acquiring the business rather than simply buying shares in the company, employment transfer rules may also need to be considered. The exact position will depend on the structure of the proposed transaction.
Look for disputes and potential liabilities
Existing disputes do not necessarily prevent a business from being sold, but a buyer is likely to want details of anything that could create a financial or legal liability after completion.
This can include unpaid invoices, threatened claims, customer complaints, employment disputes, contractual disagreements, regulatory matters or litigation. Identifying these issues in advance gives the seller more time to consider how they should be resolved or disclosed.
Prepare for due diligence
Once a transaction becomes serious, the buyer and its advisers will usually request a large amount of information. Preparing a clear set of records in advance can save time and reduce the risk of the process becoming disorganised.
Common due diligence requests may include:
- Company incorporation and statutory documents
- Shareholder and board records
- Material customer and supplier contracts
- Property documents and leases
- Employment contracts and staff information
- Insurance policies
- Details of disputes and claims
- Intellectual property registrations and licences
- Finance and security documents
- Relevant regulatory licences or permissions
Think about confidentiality before approaching buyers
Business owners will often want to protect sensitive information while discussions are at an early stage. A confidentiality or non-disclosure agreement can help set out how financial information, customer details, pricing information and other confidential material may be used.
It is usually better to agree confidentiality terms before detailed information is shared, rather than trying to deal with the issue after documents have already been disclosed.
Heads of terms can help set the direction
Once the main commercial points have been discussed, the parties may use heads of terms to record the proposed structure of the deal. These can cover the price, what is being sold, timing, exclusivity and other important points.
Heads of terms are often largely non-binding, but some provisions can be intended to have legal effect. It is therefore sensible to have them reviewed before signing.
Share sale or asset sale?
The legal work will depend heavily on how the transaction is structured. In a share sale, the buyer acquires the shares in the company and the company continues to own its existing assets and liabilities. In an asset sale, the buyer purchases selected assets and parts of the business.
Each structure can have different consequences for contracts, employees, liabilities, tax and the documents required. The appropriate structure should be considered with legal and tax advisers before the transaction is finalised.
Do not leave preparation until a buyer is waiting
Preparing a business for sale is usually easier when there is time to correct records, locate documents and resolve outstanding issues before a buyer begins asking questions. Trying to fix everything during due diligence can create unnecessary pressure and may slow down the transaction.
Even if a sale is still some way off, reviewing the legal position of the company can help identify issues that may affect a future transaction.
Speak to Pembridge Solicitors about preparing your business for sale
If you are considering selling your company or business, our commercial team can help you review the legal position before the sale process begins. We can assist with company records, commercial contracts, heads of terms, due diligence and the transaction documents required to complete the sale.
Contact Pembridge Solicitors on 0330 900 0377 or send us an enquiry to discuss how we may be able to help.
This article is for general information only and does not constitute legal advice. The appropriate steps will depend on the circumstances of the business and the proposed transaction.