Selling a Business – What Can Go Wrong?

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Selling a Business

When selling a business there are a number of pitfalls that can lead to liability further down the line. The Buyer will be looking to protect their interests.

If you instruct us to act for you as a seller  we will look to reduce, limit and cap your liability as much as possible.  To help you understand what can go wrong we have explained some of the hidden pitfalls when selling your business.

Disclosing information when selling your business

In the sale contract there will be warranties (promises) and indemnities (promises to pay). The process will also include disclosures by the seller and the buyers due diligence.

Understanding how to deal with these aspects is key. They are common sticking points and sometimes cause business sales to fail if not skilfully dealt with.

Negotiating on warranties, indemnities and disclosure is part of the role of commercial lawyers. There will likely be decisions to be made about the best approach – whether by way of warranty or disclosing possibly unfavourable information. If warranties and indemnities have to be given, the terms should be very carefully considered. whilst it may be tempting to agree these to push a deal through, claims later are not uncommon.

Gannons specialise in protecting sellers through the business sale process, balancing your commercial objectives to get the deal through with ensuring you aren’t left unnecessarily exposed to claims by the buyers down the line.

Restrictive Covenants

When selling a business, the Buyer is likely to want to prevent you personally from competing with that business after it is sold (whether by setting up a similar business or joining an existing competitor) and soliciting (or poaching) clients, suppliers or employees from the business. These can last anywhere from 3 months to 24 months and will practically have a big effect on what you can do next. We negotiate the shortest periods for non-compete clauses, however, you need to ensure that you can earn a living and are not prohibited from building any future businesses.

Employees

Employees are often important to the success of the enterprise and in selling a business they face upheaval. This can lead to resignations, redundancies and potential claims. You will need to ensure that you consult your staff and reassure them – we can guide you through how to deal with staff when selling a business.

Contracts

The Buyer will usually be purchasing a main asset whether you are selling a business or selling shares, most often this comes down to:

Goodwill and intellectual property

Do you have the appropriate rights in the intellectual property?  If software, designs, commissions, coding, etc have been commissioned you need to make sure that the rights are signed over to you.  The fact that you paid for the commission does not automatically transfer the intellectual property rights to you – they remain in the hands of the creators without taking the extra step. Is an assignment from any third party such as a contractor required? Have your employees signed over their intellectual property rights?

Assignment of rights to the seller before the shares are sold

If the value when selling a business is in the commercial contracts you have, are those contracts subject to change of control provisions, whereby your sale of the business could result in termination of those contracts? Can you assign or novate (transfer) those contracts?

Limit your liability

In selling a business you cannot account for every eventuality, there can be unforeseen circumstances. For example, you may have an outstanding tax bill that you weren’t aware of or an aggrieved ex-employee or customer seeking damages from the Company.

The Buyer will almost certainly be claiming their loss (including legal fees) against you for breach of contract and warranties. To protect yourself from the unforeseen, limit your liability where possible. We can negotiate limits on the types of claim, time periods for bringing a claim and the minimum and maximum financial limits on claims brought.