For many business owners, a sale represents the culmination of years of growth and hard work. Whether the motivation is retirement, strategic exit, or to unlock capital for new ventures, preparation should begin well before a buyer is identified. A thorough internal legal “health check” undertaken within 12 months prior to a potential transaction can reduce deal friction, enhance valuation, and prevent costly delays during the due diligence process.
Below are some of the common legal pitfalls that owners should address in advance of a potential sale.
1. Corporate Structure and Share Ownership
Prospective buyer's solicitors will review your company's share capital, ownership structure, and statutory registers. Common issues include:
- Unrecorded share allotments or transfers, including missing or unsigned board/shareholder resolutions and stock transfer forms
- Unrecorded share buybacks or failure to meet statutory buyback procedures
- Inconsistencies between the filings at Companies House and the statutory registers
Companies should review their Companies House filings to ensure that all share issues and transfers are correctly recorded and that any discrepancies between statutory registers and public filings are rectified. Further, any shareholder and option arrangements must be clearly documented.
2. Key Commercial Contracts
When acquiring a business, a significant part of the value often lies in its key commercial contracts. The buyer's solicitors will closely review the company's contractual rights and obligations, especially within material contracts above a certain value (relative to the revenue of the business) with major customers and suppliers. Key issues include:
- Absence of written agreements or reliance on expired terms
- No provisions allowing novation or assignment of contracts on sale
- Change of control clauses requiring third-party consent, which may delay or block a transaction
- Hidden liabilities (e.g. uncapped indemnities or liquidated damages clauses)
- Termination for convenience provisions that could trigger early cancellation post-sale
- Undocumented variations to contracts (e.g. payment terms, service scope)
Companies should compile and review all key contracts to ensure they are current, enforceable, and transferable. Where necessary, consider updating agreements to more buyer-friendly terms.
3. Employment and Consultancy Arrangements
Employment compliance is a key area of due diligence. Issues that frequently arise include:
- Absence of signed employment contracts or unclear job descriptions
- Misclassification of contractors and consultants, consultancy agreements with disguised employment risk
- Unclear or unenforceable restrictive covenants
- Disputes over bonuses or termination provisions
Employers should review all employment and consultancy arrangements as well as policies and staff handbook to ensure they are current and compliant with employment legislation.
4. Intellectual Property (IP) and Information Technology (IT)
For many businesses, value lies in their brand, systems or proprietary know-how. Buyers will seek clarity on IP ownership and protection. Common issues include:
- IP assets not properly registered or assigned, particularly where developed by third parties or consultants
- Domain names or software registered in personal names rather than the company's
- IT systems reliant on unlicensed third-party tools
Businesses should audit their IP portfolio (trademarks, software, designs) to ensure ownership is clearly vested in the company and, where applicable, registered in the correct name and jurisdiction.
5. Regulatory and Compliance Matters
When it comes to non-compliance with regulatory obligations, even minor compliance failures can raise concerns or trigger price adjustments. Key areas include:
- No formal or up-to-date data protection policies (UK GDPR compliance)
- Lack of clear anti-bribery, anti-money laundering or ESG policies
- Incomplete health & safety documentation or gaps in compliance (where relevant)
- Sector-specific authorisations or licences expired or incorrectly held
A regulatory compliance audit can help identify and close gaps before diligence begins. Ensure policies are documented, understood by staff, and properly implemented.
6. Financial and Accounting
While not strictly legal, well-prepared financial records are essential for a smooth sale. Legal and tax compliance should align with financial statements. Sellers should work with accountants and advisers to ensure:
- Any historic tax exposures or liabilities are identified and managed
- Dividend payments are properly documented (including dividend certificates and board minutes evidencing sufficient distributable reserves)
- Director loans or intercompany balances are documented and, where possible, settled
- Leasing and finance agreements are available for review and up to date
7. Organise and Prepare Documentation Early
Finally, begin preparing a well organised folder structure to house all key documents. The buyer's solicitors will request these during their due diligence exercise. Being ready signals organisation and reduces the risk of surprises later.
Final Thoughts
Preparing for a sale is as much about risk management and reduction as it is about valuation uplift. Addressing these legal areas in advance not only reduces execution risk but may materially enhance buyer confidence and valuation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
