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Don’t Cut Corners When Appointing a Solicitor to Assist with Your Business Sale

We have recently seen 2 deals ‘go wrong’ in legal stages because the buyer decided to ‘cut corners’ by not paying for good quality legal advice.  In our experience this is a big mistake and if you engage Anderson Shaw to sell your business we insist that you take the right legal advice from an appropriately qualified Corporate Lawyer.  If the buyer says he would like to complete the purchase without using a solicitor, alarm bells should be ringing and it should be made very clear to the buyer that you will be using a solicitor and that he/she should too.

To demonstrate the point, here are some of the areas with which, as a seller, your solicitor needs to be involved once Heads of Terms have been agreed:

Due Diligence
Once the heads of terms have been signed, the buyer will start the process of ‘due diligence’ seeking substantial, documented information on almost every aspect of your business.  Sellers are often surprised by the detailed information that the buyer wants to see.  It is a lengthy and laborious process and can be a minefield.  Your solicitor will need to guide you through this to ensure that nothing is missed.  Equally, he/she will ensure that you are not providing information that is inappropriate – for instance, you may have forecasts for the business but the way these are disclosed is important to avoid them becoming a warranted document.

3rd Party Approvals
Various approvals will be required for a sale.  For example, if there is a lease, the consent of the landlord will probably be required, if there are HP agreements the funders’ approval may be required to transfer these.  Your solicitor will identify at an early stage which 3rd party approvals are needed and ensure they are obtained in good time before completion of the sale.

Purchase Agreement
In a share sale, it is the buyer’s solicitor who will produce the first draft of the purchase agreement, which inevitably will be rather too much ‘in their favour’.  Your solicitor will make the amendments required to protect your interests.  No matter how well the agreement is written, it will not be easy for a layman to interpret and there is a real danger that, as initially drafted, it will contain unacceptable or onerous conditions.

Warranties and Indemnities
Business purchase agreements will always include a list of promises that you give to the buyer – these are called ‘warranties’ and ‘indemnities’.  For example, the buyer will insist that you give written assurances that all of the information supplied is accurate.  In addition, the buyer may require an indemnity to cover the costs of certain future liabilities of the business (i.e. promises that you will pay these).  In addition, for share sales, there will be a whole section devoted to tax warranties most of which will be ‘as clear as mud’ to a layman.  Your solicitor will ensure that the warranties and indemnities are reasonable and he will also ensure that appropriate limits on any claims are in place.

Disclosure Letter
The ‘disclosure letter’ is a very important document, as it qualifies some of the warranties you give in the purchase agreement.  This is important as it is always the case that some of the warranties will be drafted in such a way that they catch items which are not appropriate.  The effect of the disclosure letter is that the buyer will then be unable to take any action against you in relation to the general and specific issues disclosed.  It follows from the comments above about warranties and indemnities that this is something which a solicitor has to involved in preparing.  He/she will be involved with negotiating the detail of the letter with the buyer’s solicitor.

Post Sale Restrictions
The buyer will want to protect the business once he takes over and will look to include restrictions on the seller that fall into three basic categories - non-solicitation of customers, non-solicitation of employees and the seller not to compete with the business.  Again the language will be technical but your solicitor will ensure that the restrictions are reasonable and that they fall away after a reasonable time period.  

If either party does not know a suitably qualified corporate solicitor Anderson Shaw can always provide 2 or 3 names of solicitors that have a track record with us for you to choose from.  Do not be tempted to use your ‘family solicitor’ unless the firm has a Corporate Partner.

At Anderson Shaw we are always happy to speak with business owners on a confidential, no-commitment basis, even if a sale is many years away so please do not hesitate to contact us.

Anderson Shaw has offices on the outskirts of Stratford-Upon-Avon and provides business broker and corporate finance services for clients throughout the Midlands and the UK.

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