Barker Gotelee

Many people are familiar with the legal effort involved in selling a house.  Fewer people sell a business, but when they do they can discover that the process is even more time consuming and, crucially, expensive, than selling a property.

It is often someone approaching retirement who wants to sell his business.  Selling the business realises capital value for the owner and may preserve the jobs of valued employees who would otherwise be made redundant.

Unfortunately, for many small or medium businesses there can be particular difficulty in keeping legal (and other) costs proportionate to the value of the sale.  To understand this difficulty (and then deal with it), some background information helps.

There are two typical ways to sell “a business”.  The buyer might buy specified assets, take over certain liabilities (including employer responsibilities towards employees) and represent itself to the world as the new owner of the business.  If the business has been run through a company, the buyer might buy the shares in the company and indirectly become the new owner of the business.  There are significant legal differences between the two approaches but also many similarities.

The buyer can normally expect a due diligence process, followed by a contract that includes warranties and disclosures.

Due diligence is the process by which the buyer investigates the business.  Warranties are legally binding statements made by the seller. If a warranty is inaccurate, the buyer can sue the seller.  Disclosures are limitations on the warranties, to limit the seller’s liability.

A very significant part of the legal work arising on the sale of a business arises from this due diligence, warranty and disclosure process - and this process is usually driven by the buyer’s solicitors.  They also normally write the contract.  This document is often long, detailed and complicated.  Depending on the value and nature of the business to be sold, the typical contract can be disproportionate.  A deal can even fall apart because it is no longer cost effective for the parties to proceed.

It is recommended that the potential seller of a business should seek legal advice from an early stage.  That advice will allow a seller to negotiate a suitable sale structure with the buyer, to keep costs from becoming overwhelming relative to the value of the sale. Moving away from the standard process might be appropriate when the value of the business is relatively small.

This article gives very brief details about a complex area of business law.  If you would like advice about this subject relevant to your particular circumstances, please contact Clare Richards at Barker Gotelee.

Clare Richards

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