Selling a business can be a significant and positive milestone, but it can also entail considerable legal complexity. Without proper preparation, even profitable, well-run companies can face deal-breaking obstacles. From compliance oversights to outdated contracts or unaddressed employment issues, these risks can delay or even derail a sale.
Hourglass Legal Consulting, a corporate law firm with extensive experience in mergers and acquisitions (M&A), emphasizes that many of these issues are preventable.
With proactive legal planning, owners can approach the sale process with increased confidence and negotiating power. Drawing on years of advising sellers across various industries, Hourglass Legal advocates early legal review as a critical part of exit planning rather than an afterthought.
Identifying and Cleaning Up Legal Liabilities
Before bringing a company to market, owners should identify lingering legal risks that could surface during due diligence. These may include unresolved disputes, regulatory lapses, unclear intellectual property rights, or non-compliant employment practices.
Even minor issues can become leverage for buyers to reduce valuation or alter deal terms. Hourglass Legal regularly advises clients to conduct a "legal audit" at least six to twelve months ahead of a planned sale. This process involves reviewing key documents such as contracts, corporate records, licenses, insurance policies, and HR files.
Correcting liabilities early prevents last-minute delays and positions the company more favorably. It also demonstrates professionalism and transparency, both of which are crucial to building buyer trust.
Reviewing and Renegotiating Key Contracts
Astute buyers will closely examine contracts that impact ongoing revenue or business continuity. These include customer agreements, vendor relationships, leases, and employee arrangements. Contracts with vague terms, missing signatures, or burdensome clauses are common pitfalls that can weaken a seller's position.
Sellers should evaluate which agreements can or should be renegotiated ahead of time. For instance, customer contracts with short termination windows or automatic renewal provisions may need updating. Similarly, restrictive covenants in vendor agreements could limit the buyer's flexibility after the sale.
Sellers should also assess the assignability and stability of contracts and revise or renegotiate them when appropriate. Cleaning up these agreements can make the business more attractive to prospective buyers.
Establishing or Updating Corporate Governance
Well-documented corporate governance practices give buyers confidence in leadership and accountability. Private companies often overlook this area, particularly if the owner handles most decisions informally.
This approach can be problematic during a sale, particularly if there are multiple stakeholders or past capital raises. Buyers want up-to-date organizational documents, board resolutions, shareholder agreements, and capitalization tables.
The importance of clearly documenting decision-making authority, share ownership, and any prior equity issuances can't be overstated. Incomplete or contradictory documents can lead to disorganization or, worse, legal exposure. Addressing governance gaps in advance reduces confusion and supports a smoother transition.
Addressing Employment and Compensation Issues
Employee matters are often the subject of close scrutiny in due diligence. Sales are frequently delayed by unresolved wage claims, classification errors, or outdated offer letters.
Sellers should verify compliance with labor laws, including wage and hour rules, benefits administration, and classification of contractors versus employees. Executive compensation plans, bonus structures, and severance policies should be well-documented and up-to-date as well.
It's also essential to confirm that employment agreements include confidentiality and non-solicitation (and, in some instances, non-compete) provisions that protect the business post-sale. Addressing these details in advance minimizes risk and reassures buyers that the workforce will remain stable through the transaction.
Conclusion
Preparing for a business sale involves more than financial due diligence. Legal readiness plays a decisive role in securing a successful transaction. Hourglass Legal recommends starting the legal cleanup process well in advance, ideally a year before a planned exit.
By identifying liabilities, updating documentation, and clarifying governance, business owners can avoid surprises and preserve deal value. To navigate these challenges effectively, it's advisable to work with a firm that understands the legal and strategic nuances of M&A.
