Selling your business - legal work needed to prepare

Preparing your business for sale in the UK involves a complex legal process. Once you have decided to sell, the earlier you start preparing the better. Of course you would rather keep professional fees to a minimum but instructing lawyers early almost always pays off. Being prepared is likely to impress potential buyers who may otherwise be put off if information, details and a clear proposition aren't already in place.

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Anticipate and be ready for due diligence

Due diligence is not just a set of financial questions. It is a comprehensive investigation into a business's financial health, legal standing, and operational efficiency. It's a critical step in the sale process, as it helps potential buyers assess the risks and opportunities associated with the acquisition.  

Key areas to focus on during due diligence include:

• Financial records - ensure accurate and up-to-date financial statements, tax returns, and bank records.  

• Legal contracts - review and organize all contracts, including leases, supplier agreements, and employment contracts.  

• Intellectual property - identify and document all intellectual property rights, such as trademarks, patents, and copyrights.  

• Regulatory compliance - verify compliance with all relevant industry regulations and licenses.  

• Tax liabilities - assess any potential tax implications of the sale.  

Expect a buyer to want to negotiate on payment terms

The deal consideration refers to the terms of the sale, including the purchase price, payment terms, and any conditions precedent or subsequent. Key considerations include:

• Purchase price - determine the fair market value of the business and negotiate the purchase price.

• Payment terms - decide on the payment structure, whether it's a lump sum, installments, or a combination of both.

• Earn-out provisions - consider including earn-out provisions to incentivize the seller to achieve specific performance targets post-sale.

Plan for warranties

Warranties are a key part of most deals. The buyer will want strong and potential risky warranties to be give by the sellers and the sellers will want to restrict and water down warranties. Consider this at the pre-sale stage.

Conditions precedent: Outline any conditions that must be met before the sale can be completed, such as regulatory approvals or third-party consents.  

Obtain necessary shareholder consent

If you're selling a company, you may need the consent of shareholders, directors, and other stakeholders. Ensure that all necessary consents are obtained to avoid delays and legal complications.  

Contracts

If your business has any existing contracts with supplier, clients, obligations, understanding or commitments with any other parties this must be made plain along with the details, terms and conditions.

Employees and Management

Your purchaser will need a full list of the employees, management teams and Directors, whilst the list should not include names it should include salary, length of employment, their working hours, notice period, if they have a fixed term of employment and any bonuses or incentives they receive.

The list should be as comprehensive as possible and you should also ensure that all employee contracts are made available.

Pensions and Benefits

If your company has a bonus or benefits scheme in place you will need to provide details of this, including what those are, and the employees who receive them. Pensions will also need to be detailed and this information should be the employers and employee’s contributions to the scheme, the details of the pension scheme operator and any changes that have been proposed to the scheme and are under consideration.

Business Assets

A list of assets owned by the business will be required, as well as any outstanding monies owed on those assets, presumably the assets will have been regularly valued and so you will also need to include a copy of the latest valuation. If you do not have a valuation for the assets you will need to arrange for one.

Property

Many businesses own multiple properties to conduct their business operations and these will also form part of the due diligence process.

You will need to provide a list of the freehold and leasehold properties owned by the company, and any leaseholds or rights to occupy granted, mortgages, charges, debentures, pre-emption rights and any third-party rights over the properties. It is also likely you will need details of the utilities and bills that come with the property, and a valuation.

Litigation

If your company is involved in litigation proceedings or a dispute with a third party, or even has an awareness of litigation proceedings that affect the company you must declare it and provide all relevant details, such as the amount of money involved, the issues and costs incurred and expected.

Intellectual Property and Licenses

You will need a list of the following whether registered or unregistered:

• Business and domain names

• Copyrights

• Trademarks

• Patents

• IPR

• Database rights