Selling a Business: The Key Legal Stages

Selling a business is a major milestone.  Whether a business owner is planning retirement, pursuing a new opportunity or realising the value built up over many years, understanding the legal process can help ensure a smoother transaction. 

Here is a guide to the key legal stages involved in selling a business in England and Wales.

1. Preparation and Pre-Sale Due Diligence

The groundwork laid before seeking or engaging with potential buyers can determine how smoothly a sale progresses and how much the business can ultimately be worth.

A vital early question to consider is whether the business is ‘sale ready’.  Buyers are often prepared to pay a higher price for businesses with strong financial records, well documented processes and up-to-date legal documentation.  For more information on preparing your business for sale, read our guide: Preparing your business for sale: a legal guide for owners  - Clarkson Wright & Jakes Solicitors

One of the first decisions to make is how the sale will be structured: if the business is operated through a limited company, will the buyer acquire the shares in the company (a share sale) or purchase the businesses individual assets (an asset sale)? On a share sale, the buyer purchases the shares of the company itself, acquiring all its assets and liabilities within it.  On an asset sale, only specific identified assets are transferred, and many liabilities might remain with you as the seller.  The choice has significant implications for both tax and legal liability, and so both solicitors and accountants should be involved to advise on this decision from the outset.

Early tax planning can be particularly important.  Sellers may be eligible for beneficial treatment for Capital Gains Tax payable on the proceeds of a qualifying sale.  An accountant will be able to advise on eligibility and the most tax-efficient structure for the transaction.

Key business records should be gathered and checked, including financial information, contracts, employment documentation and details of any intellectual property owned by the business.

Delays can arise in transactions because key documents cannot easily be found.  Spending time organising contract files, employment records and company books before a buyer is involved can save considerable time and cost later in the process.

Any unresolved disputes with employees, suppliers or customers should be addressed before a sale process begins.  Buyers will look for problems, and unresolved issues will either reduce the price or worse, could derail the deal entirely.

2. Confidentiality and Heads of Terms

Once a suitable buyer has been identified, the first formal step is usually the signing of a Non-Disclosure Agreement (NDA).  This protects any sensitive business information while discussions and due diligence take place.

The parties will then agree Heads of Terms (sometimes formulated as a Letter of Intent, Offer Letter or Memorandum of Understanding).  This document sets out the key commercial terms of the proposed deal: the purchase price, the structure of the sale, and the intended timetable.

Although Heads of Terms are largely not legally binding, agreeing the key commercial points at an early stage can help reduce the risk of costly and stressful negotiations later on.

3. Buyer’s Due Diligence

The buyer’s legal and financial advisers will carry out a thorough investigation of the business.  This is known as due diligence and is often one of the most demanding stages for a seller.

Buyers are likely to ask detailed questions about the business and its operations.  

A virtual data room is often used, containing relevant documents and information.  The buyer’s solicitors will raise formal enquiries, and the seller’s advisers will help coordinate and respond to those enquiries.

A well-organised data room, prepared in advance, can significantly speed up this stage and demonstrate to the buyer that the business is well managed and sale ready.

4. Drafting and Negotiating the Sale Agreement

The principal legal document in any business sale is the sale agreement whether in the form of a Share Purchase Agreement (SPA) or an Asset Purchase Agreement (APA), depending on the structure agreed.  This document governs the transaction and is negotiated carefully between the parties’ advisers.

Warranties and Indemnities

Warranties are contractual statements of fact about the condition of the business covering areas such as finances, contracts, assets, employees and legal compliance.  If a warranty proves to be incorrect, the buyer may have a claim against the seller.

The seller’s solicitor will prepare a Disclosure Letter alongside and by reference to the sale agreement.  This document identifies known exceptions to the warranties and helps limit the seller's liability after completion.

Consideration and Earn-Outs

The agreed price may not all be payable on completion.  It is common in owner-managed business sales for a portion of the consideration to be deferred or contingent on the future performance of the business.  Sellers will wish to ensure that their interests are protected and secured to ensure that they receive what is due to them.

Restrictive Covenants

The sale agreement will almost certainly include restrictive covenants.  These are clauses preventing the seller from setting up a competing business, soliciting customers, poaching staff or otherwise disrupting the business for a defined period after completion.

5. Employment Law and TUPE

Where the sale involves the transfer of a business or part of a business in an asset sale scenario, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) will likely apply, providing protection and continuity of service to staff.

By contrast, TUPE does not usually apply on a share sale, as the employing company remains the same legal entity and employees continue to be employed by that company following completion.

Failure to comply with TUPE obligations can result in significant financial penalties, so this aspect of any sale requires careful attention at an early stage.

6. Completion and Post-Sale Obligations

Completion is the moment at which ownership of the business legally transfers to the buyer.  

Various post completion steps may also need to be dealt with, depending on the transaction.

A seller’s obligations do not necessarily end at completion and they may be required to assist with a handover period while they remain bound by any restrictive covenants agreed in the sale documents.

Getting the Right Advice

Every business sale is different, and taking advice at an early stage can help identify issues and keep the transaction on track.

Instructing an experienced solicitor as early as possible, ideally before a seller engages with any buyer, is one of the most important steps a seller can take to achieve the best outcome.

When considering selling your business, our Corporate and Commercial team can guide you through each stage of the process, helping to navigate the legal complexities and focus on achieving a successful outcome.