Selling your business is likely the largest commercial transaction of your professional life. The legal process — due diligence, warranties, earn-outs, restrictive covenants — can significantly affect how much you actually receive and on what terms. Here is what to expect and what to watch for.
Asset Sale vs Share Sale
The fundamental structure question: is the buyer buying the business's assets (asset sale) or the company's shares (share sale)?
In a share sale, the buyer acquires the company itself — all its assets, liabilities, contracts, employees, and history. The seller receives the proceeds personally. This is generally more tax-efficient for the seller (Business Asset Disposal Relief may apply) and simpler commercially where the business has many contracts and relationships.
In an asset sale, the buyer cherry-picks the assets it wants — typically goodwill, contracts, stock, equipment — and leaves liabilities behind. The proceeds go to the company, not to you personally, which creates a further step to extract value (dividend, liquidation). Buyers often prefer asset sales because they avoid inheriting unknown liabilities.
Understanding which structure is on the table — and its implications — is the first conversation to have with your advisors.
Due Diligence
The buyer will conduct due diligence — a detailed investigation of the business covering legal, financial, commercial, and tax matters. They will ask for significant volumes of documents and information. Prepare for due diligence before the process starts. Common issues that arise and delay or derail deals:
- Contracts without proper assignment provisions (many contracts cannot be assigned to the buyer without third-party consent)
- Employment issues — undocumented arrangements, potential claims, TUPE implications
- IP ownership gaps — software, branding, or designs created by contractors or employees without proper assignment
- Regulatory compliance — licensing, data protection, sector-specific requirements
- Outstanding litigation or disputes
Get ahead of these issues. A pre-sale legal review identifies them while you still have time to fix them.
Warranties and Indemnities
Warranties are statements of fact about the business given by the seller at exchange. If a warranty proves to be untrue, the buyer has a claim for breach of warranty — typically for the difference in value between what they were told and reality. You will be asked to give warranties across every area of the business: accounts, assets, contracts, employees, IP, litigation, tax, and property.
Read every warranty carefully. Disclose anything that qualifies a warranty in the disclosure letter — an accurate, complete disclosure letter is your primary protection against a warranty claim.
Indemnities are different — they are promises to pay pound for pound for a specific liability if it arises. They typically apply to known risks that the buyer is not prepared to price into the deal.
Negotiate caps on your total warranty liability (typically a percentage of the sale price), time limits on claims (typically 18–24 months for general warranties, longer for tax), and minimum claim thresholds.
Earn-Outs
An earn-out structure defers part of the sale price, making it contingent on the business's future performance. They are common where there is a gap between the seller's view of value and the buyer's, or where the business is growing rapidly and the buyer wants the seller's continued commitment.
Earn-outs are a source of significant post-completion disputes. The key issues: how is the earn-out metric defined (EBITDA, revenue, profit), who controls the business during the earn-out period, and what restrictions apply to the buyer's management of the business that might affect performance.
If there is an earn-out in your deal, take specific advice on the earn-out provisions. How the metric is calculated, and what the buyer can and cannot do to the business during the earn-out period, are the two provisions that matter most.
Restrictive Covenants
Expect to give restrictive covenants — non-compete, non-solicitation of customers and employees — as part of the deal. These are enforceable if reasonable in scope, geography, and duration. Two to three years is typically considered reasonable for a business sale.
Understand the practical implications before you sign. If you intend to work in the same sector after the sale, the covenants may prevent you from doing so.
Bonsai Law guides owner-managers through business sales across the UK — from heads of terms to completion. A pre-sale review now protects the value you have built.
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