Why You Should Prepare Your Business For Sale From a Legal Perspective

Selling your business can be a difficult concept to get your head around – especially when you have grown it from the ground up.  But that’s no reason to put your head in the sand when it comes to preparing for sale. In this guest blog,  Kate Westbrook - Head of Commercial and Simon Hore - Corporate Partner of Thrings Solicitors will outline why you should prepare your business for sale from a legal perspective. 

You probably didn’t start out in business because you love detail, contracts or thinking about legal risk. You’ve been successful because you have a clear vision and plan, you’re a calculated risk taker, and you’re highly motivated. Now you’re ready to sell your business, you don’t need to worry about the ‘legals’ now either…do you?

Wrong! There are huge benefits to sorting them out well in advance of selling your business. This will benefit you personally, as the seller, but also will ensure that your business is in good shape to continue to thrive after you complete the sale.

But what do we mean when we say ‘sort out your legals’? Essentially, ensuring that the legal risks in your business are reduced as much as possible. This includes:

- Checking that all company administration and filings at Companies House are correct and that all shareholders have rights to sell their shares;

- Making sure you have watertight contracts with valuable customers and suppliers, providing as much certainty as possible whilst reducing contractual risk as much as possible;

- Protecting the business with employee contracts featuring suitable restrictive covenants and perhaps motivating employees by share schemes or other benefits;

- Ensuring that you own any intellectual property that is integral to the business value;

- Reducing the possibility that disputes will arise with customers, suppliers and employees;

- Avoiding personal guarantees in banking arrangements, supplier contracts or property leases where possible;

- Formally extending property leases at the end of their term where appropriate.

Maximise Value

There are a variety of reasons why you should tie the legal knots prior to selling. Top of that list is the fact that it will help you to maximise the value you receive for your business.

When buyers start to get to know your business, they’ll form an opinion of value based mostly on financial performance and future plans, but that value can reduce if they discover legal risks as they dig deeper.

This can happen during the due diligence process – this is the stage of a business sale transaction where the buyer asks you to provide information about the legal, tax and accounting position of the company – they will find out about significant legal risks, disputes and non-compliance which may affect their view of the business value.

Retain Value

Once you’ve sold your business and received the sale proceeds, you want to keep it! But if you haven’t taken care of the legal matters prior to sale, warranty claims made by the buyer could eat into the sale proceeds.

Sellers are usually required to give certain warranties (contractual promises) about the legal affairs and legal compliance of the company. If issues arise after sale, during the warranty period, a valid claim can be made against the seller which could result in the return of some of the sale proceeds – which unsurprisingly would be best to avoid.

Avoid delays

The process of selling a company takes time and can be stressful at the best of times. There is a lot of detail to be gone through and you’ll be working closely with your legal team throughout the process – all on top of continuing to run your business. When issues arise during due diligence, at best this can cause delays in the transaction and at worst a transaction can be completely de-railed by them.

A common issue to arise is ownership of intellectual property. Situations regularly arise where a company’s core asset is the ownership of some kind of intellectual property (such as software) but during due diligence it is discovered that the original developer was a contractor, not an employee, and had no written contract. If there is no contract saying that the IP is owned by the company paying for it – ownership lies with the original developer.

This issue is completely fixable if the developer can be found and is willing to sign something to confirm the IP ownership position, but it causes delay and can create some concern in the mind of the buyer.

Maximise chance for success

Buyers like clean. A buyer of a business doesn’t want to discover a myriad of legal issues, which may or may not be an issue for them once the sale has concluded.

By anticipating the legal issues and reducing them as much as possible, this provides a great first impression and gives your buyer confidence in what they’re buying and maximises your chance that you’ll successfully sell your business.

It’s never too early (or too late) to start

In an ideal world, you’d start your business with the end in mind and invest in good quality legal advice and documentation from the start. Realistically, it’s not always possible to invest in the legal support when you’re a growing business.

So, whilst it’s never too early to make a start it’s also never too late to start. There are usually some wins that can be made in a relatively short space of time prior to sale – but it is preferable to avoid last minute work where possible and take a more measured and considered approach to the areas of risk.

Legal strategy review

Thrings’ Corporate team regularly works with businesses of all sizes to help them identify key areas of legal risk across a variety of legal areas – such as contracts, employment, property, intellectual property, data protection and beyond.

This enables the business owners to make decisions as to which area needs investment and prioritise that investment where necessary. To find out more, visit www.thrings.com.

Kate Westbrook - Head of Commercial of  Thrings Solicitors

LinkedIn: linkedin.com/in/katewestbrookthrings

Email: kwestbrook@thrings.com

Simon Hore - Corporate Partner of Thrings Solicitors

LinkedIn: linkedin.com/in/simon-hore-251a2021

Email: shore@thrings.com