Skip To The Main Content

Five legal pitfalls to avoid when selling your business

sponsored by

businesses-for-sale-solid-logo
ThinkstockPhotos-1034279702-(1)_detail
The process of selling your business can take months and the preparations for the sale might even begin years before the actual sale. 

As you prepare for the sale, you should be aware of the legal pitfalls that could send you back to square one. Ignoring them could lead to months of unnecessary stress and misspent time. 

If you know about them, however, you can side step them and successfully hand over the keys to the new owner.


Here are some of the main legal pitfalls that you must try to avoid. 

Tax

Selling your business could have huge tax implications for you. A huge tax rate could be applied to you when you sell. Besides that, you might have to pay additional local council taxes. Some tax planning with the help of an expert could help you to maximize your deductions. Additionally, it will help you to avoid any penalties. 

Before you are done with the sale, contact a tax advisor to establish the income expectations for that year. Calculate how much tax you might need to pay based on your projected gains and establish the tax payments needed and any year-end payments you need to make. 

Confidentiality

 
Early in the process of the sale, ensure that there is a confidentiality agreement between you and the buyer. Your lawyer should draft the agreement and ensure everyone who will gain access to your information appends his or her signature. 

This is in case the sale does not go through. Some of the information could, in a worst-case scenario, expose your corporate secrets and be used by your competition to run you out of business. 

In case the agreement is breached, there should be serious penalties in place as well as clear remedies. While none of these measures will guarantee confidentiality, they can deter the mishandling of your information. 


Besides that, it can help to ensure that you are compensated in case of any leaks that affect your competitiveness. If possible, only release part of your confidential information to the buyer. If he or she expresses further interest, you can release more details. 

Financial Records

 
When selling your business, you want it to be seen in the best light. However, there is a difference between presenting the business in the best light and misrepresenting the facts to buyers. At some point in the sale process, buyers will want to see your financial records. 

The buyer will hire financial experts that will go over all the records. While you may manage to keep some of the details hidden, the process will go on even after the sale. In case any red flags are raised, the buyer will usually have an ironclad contract. He or she may decide to pursue you in court and cause you to lose a significant chunk of what you were to receive. Besides that, he or she may decide to keep the business. 

Ensure you speak to a financial adviser and conduct due diligence. He or she will give you advice on how to present all financial details, including business forecasts to potential buyers. 

Contracts

Many contracts that you may have signed with other commercial partners will usually have a consent clause or notice to other parties when a sale is planned. It is important to hire a legal expert who can review any contracts that you might have signed with other parties. 

If you do not do this early, it might jeopardize the sale. Delayed consideration of your contracts might also lead to huge delays, which could also affect your negotiating power during the sale. 

Debts and Assets

 
If the business has taken any loans, it is important to examine the terms to understand if it could trigger adverse clauses such as early repayment. 

It is important that the business presents all the information about its assets and debts. Trying to hold back this information could cause a termination of the sale when the buyer finally finds out toward the end.
 

Each business is unique, and it will come with its own legal problems. Decades of hard work could all boil down to the last few months when you are about to cash out. If you do not take time to get all the details correct, you might end up losing a huge chunk of your effort.


By Jo Thornley, Head of Brand and Partnerships at Dynamis. Joining in 2005 to co-ordinate PR and communications and produce editorial across all business brands. She earned her spurs managing the communications strategy and now creates and develops partnerships between BusinessesForSale.com, FranchiseSales.com and PropertySales.com and likeminded companies.