Selling a Business: The Key Legal Stages

Deciding to sell your business is one of the most significant decisions you will ever make. Getting the process right requires careful planning, the right professional team, and a clear understanding of what lies ahead. From the first preparations to the final handover, the journey typically takes between three  and six months, and the legal process is central to every stage. The preparations may take longer especially if a pre-sale reorganisation is required to hive-out the business and assets into an SPV whose shares are then to be sold. This is usually carried out where a company has multiple businesses and only one is going to be ‘separated’ and hived out into a new company whose shares then become the target.

Here is a guide to the key legal stages involved in selling a business in the UK.

1. Preparation and Pre-Sale Due Diligence

The groundwork you lay before approaching buyers will determine how smoothly the sale proceeds and how much you ultimately achieve for your business.

The first decision is structural: if the business is operated by a limited company, will the sale take the form of a share sale or an asset sale? In a share sale, the buyer purchases the company itself, acquiring all its assets and liabilities. In an asset sale, only specific assets are transferred, and most liabilities remain with you as the seller. The choice has significant implications for both tax and legal liability, so your solicitor and accountant should be involved in this decision from the outset.

Where the business is run by a sole trader or a partnership, a share sale is not possible – the transaction will always take the form of an asset sale, transferring goodwill, customer relationships, equipment, contracts and any other agreed assets to the buyer. The key legal and tax considerations covered in this article apply equally to unincorporated businesses, though the specific documentation and process will differ. If you are a sole trader or partner, your solicitor will advise you on the steps relevant to your situation.

Tax planning at this early stage is particularly important. Sellers may be eligible for Business Asset Disposal Relief (BADR), which can reduce the rate of Capital Gains Tax payable on the proceeds of a qualifying sale. Your accountant will be able to advise on your eligibility and the most tax-efficient structure for the transaction.

You will also need to compile a comprehensive set of documents: at least three years of financial records and tax returns, all key contracts with customers, suppliers and employees, property leases, and details of any intellectual property the business owns. Trademarks, patents and domain names should all be formally registered in the company’s name before any buyer is approached.

Any unresolved disputes – with employees, suppliers or customers – should be addressed before the sale process begins. Buyers will look for problems, and unresolved issues will either reduce the price or 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 your sensitive business information while discussions and due diligence take place.

The parties will then agree Heads of Terms (sometimes called a Letter of Intent). This document sets out the key commercial terms of the proposed deal: the purchase price, the structure of the sale, and the intended timetable. Heads of Terms (‘Heads’) are generally non-binding, meaning they do not commit either party to completing the transaction. However, they typically include an exclusivity clause and a clause requiring the buyer to pay an agreed amount as deposit, which may only be returnable under agreed circumstances. Both are legally binding. The exclusivity prevents you from negotiating with other potential buyers for an agreed period, usually while the buyer carries out their due diligence and/or until contracts are unconditionally exchanged, the point at which the Heads fall away, and the terms of the contract take over.

3. Buyer’s Due Diligence

The buyer’s legal and financial advisers will carry out a thorough investigation of your business. This is known as due diligence, and its purpose is to verify the information you have provided and identify any legal, financial or operational risks.

You will be expected to make available a “data room”, which is either a physical or online repository containing all relevant documents, from accounts and contracts to employment records and regulatory licences. The buyer’s solicitors will raise formal enquiries, and your solicitor will manage your responses.

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 either a Share Purchase Agreement (SPA) or an Asset Purchase Agreement (APA), depending on the agreed structure. This document governs the entire transaction and is negotiated carefully between the parties’ legal teams.

Warranties and Indemnities

Warranties are contractual statements of fact about the condition of the business: its finances, contracts, assets, employees and legal compliance. If a warranty proves to be untrue, the buyer may be entitled to claim damages. As the seller, you will be expected to give a wide range of warranties, and their negotiation is often one of the most time-consuming aspects of the process.

Your solicitor will prepare a Disclosure Letter alongside the SPA. This document lists known exceptions to the warranties you are giving, carving out matters already ‘Disclosed’ and/or known to the buyer so that liability under the warranties is either negated or mitigated so that you cannot be held liable for them later. Getting the Disclosure Letter and the data room documents right is critical to protecting your position 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. This arrangement – known as an earn-out – means that part of what you receive will depend on whether the business hits agreed targets after the sale. Earn-outs can be an effective way of bridging a gap in valuation expectations, but they require careful legal drafting to protect the seller’s interests.

Restrictive Covenants

The SPA will almost certainly include restrictive covenants. These are clauses preventing you from setting up a competing business, soliciting former customers, or poaching staff for a defined period after completion. The scope and duration of these restrictions are negotiable, and your solicitor will advise on what is reasonable and enforceable.

5. Employment Law and TUPE

Where the sale involves the transfer of a business or part of a business, the Transfer of Undertakings (Protection of Employment) Regulations 2006, commonly known as TUPE, will almost certainly apply.

The ACAS guidance on TUPE transfers explains that employees’ contracts of employment automatically transfer to the buyer on their existing terms. Continuity of employment is preserved, and dismissal connected with the transfer is treated as automatically unfair. TUPE in business sales cannot be circumvented and those who attempt to do so, do it at their peril!

Both you and the buyer are legally required to inform and consult affected employees about the transfer. Failure to comply with TUPE obligations can result in significant financial penalties, so this aspect of the sale requires careful attention at an early stage.

6. Completion and Post-Sale Obligations

Completion is the moment at which ownership legally transfers. The sale documents are signed, the purchase price is paid, and control of the business passes to the buyer. In many transactions, exchange and completion take place simultaneously.

A number of ancillary steps will also need to be completed: property leases may need to be assigned, intellectual property formally transferred, and changes to company directorships registered at Companies House.

Your obligations do not end at completion. You may be required to remain involved for a transitional handover period, and you will be bound by any restrictive covenants agreed in the sale documents. It is essential to understand exactly what is expected of you before you sign.

Getting the Right Advice

Selling a business is a complex legal and commercial process. Instructing an experienced solicitor as early as possible, ideally before you approach any buyers, is the single most important step you can take to protect your position and achieve the best outcome.

If you are considering selling your business, get in touch with your solicitor to discuss your options and ensure the process is handled correctly from the outset.

For further information please contact Mohammed Akram on 020 8221 8000 or on mohammed.akram@bowlinglaw.co.uk

This article is not legal advice, it is intended to provide information of general interest about current legal issues.