For most founder-owners, selling their business is the largest and most consequential transaction of their professional life. It is also one of the most legally complex — and one where the gap between what sellers expect and what the process actually involves is consistently wide.
Share Sale or Asset Sale
Before any other legal question, the structure must be determined.
Share sale: the buyer acquires the shares of the company, taking the company as it is — all its assets, liabilities, contracts, employees, and history. For the seller, this is usually preferred: the exit is clean and the tax treatment — particularly Business Asset Disposal Relief — can be significantly more favourable.
Asset sale: the buyer acquires specified assets — customer contracts, equipment, IP, goodwill, premises — and leaves liabilities behind. Buyers often prefer this: they cherry-pick assets and avoid historical liabilities. Employees transfer automatically under TUPE in an asset sale.
The tax consequences, employee treatment, and transaction complexity all differ significantly between the two structures. The choice should be considered with a solicitor and tax adviser before heads of terms are agreed.
Stage 1: Heads of Terms
Heads of terms summarise the key commercial terms agreed before detailed legal work begins. They typically cover: structure (share or asset sale); headline price and calculation; deferred consideration — earn-outs, loan notes, staged payments; working capital and debt treatment; conditions to completion; exclusivity; confidentiality; and timetable.
Heads of terms are almost always stated to be "subject to contract" and non-binding (except exclusivity and confidentiality). But they set the framework for everything that follows. The commercial terms agreed at heads — earn-out structure, working capital mechanism, warranty scope — are very difficult to renegotiate once heads are signed without damaging the deal dynamic. Take legal advice before signing heads of terms, not after.
Stage 2: Due Diligence
Due diligence is the buyer's investigation of your business. It covers:
- Legal: title to assets; corporate documents; material contracts; IP ownership; property; disputes; regulatory compliance; insurance
- Financial: historical accounts, management accounts, normalised EBITDA, working capital
- Tax: filing history, outstanding enquiries, structural issues
- Commercial: market position, customer concentration, pipeline
Due diligence is conducted through a data room. How well-prepared your data room is significantly affects speed and cost. Sellers with clean corporate documents, signed contracts, organised IP records, and up-to-date regulatory filings give buyers fewer reasons to raise concerns. Issues found during due diligence become leverage for price reductions, specific indemnities, retentions, or conditions to completion. The fewer material issues a buyer finds, the less leverage they have.
Stage 3: The Sale and Purchase Agreement
The SPA is the main legal document. For a share sale it includes:
Warranties: statements of fact about the business given by the seller — accuracy of accounts, status of material contracts, IP ownership, tax compliance, employment, litigation. A buyer who discovers a warranty was false can claim damages.
Disclosure: the process by which the seller qualifies warranties by disclosing known exceptions. Proper disclosure is one of the most important things a seller's solicitor does — it protects against warranty claims by making the buyer aware of issues before completion.
Indemnities: specific, unqualified obligations to reimburse the buyer pound-for-pound for defined categories of loss. Unlike warranty claims (which require proof of loss), indemnities are triggered by the relevant event occurring.
Limitations on warranty claims: minimum claim thresholds (de minimis and basket), maximum aggregate liability (the cap), and time limits for bringing claims.
Restrictive covenants: non-compete and non-solicitation obligations on the seller post-completion.
Tax covenant: a specific indemnity covering pre-completion tax liabilities crystallising after completion.
Stage 4: Earn-Outs
Many SME transactions include an earn-out — deferred consideration payable based on the future financial performance of the business post-completion. Earn-outs bridge valuation gaps: if the business performs as the seller expects, they receive the additional payment; if not, the buyer has not overpaid.
Earn-outs look simple but create significant legal complexity: how is performance measured (revenue, EBITDA, gross margin)? Over what period? Who controls the business during the earn-out? What protections does the seller have against the buyer deliberately managing performance down through integration decisions or cost cuts? These provisions require very careful drafting — many earn-out disputes arise from ambiguity, not dishonesty.
Stage 5: Completion
Completion is the day the transaction closes. Funds move, documents exchange, ownership transfers. After completion: notify customers and suppliers; file Companies House updates; register share transfer; and manage any earn-out or restrictive covenant obligations.
For sellers, completion is not quite the end. Warranty claims have time limits — typically two years for general warranties, five to seven years for tax warranties. Retentions may be held by the buyer. Post-completion also includes any consultancy arrangements agreed as part of the deal structure.
Bonsai Law acts for SME founders and owner-managers selling their businesses from heads of terms through completion. If you are considering a sale or have received an approach, contact us.
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