Buying or Selling a Business: A Step-by-Step Legal Guide

Selling or buying a business or a company is a significant transaction and can seem complex. The purpose of this summary is to provide an overview of the legal process, the principal documents that are typically involved, and what a buyer or seller can expect from the beginning of the transaction through to completion. 

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1. Initial Preparation
2. Confidentiality
3. Heads of Terms
4. Buyer’s Due Diligence
5. Employees and Pensions
6. Key Contracts, Property and Consents
7. Negotiating the Sale Agreement
8. Warranties, Indemnities and Disclosure
9. Tax and Financial Matters
10. Signing the Transaction Documents
11. Completion
12. Post-Completion Matters

1. Initial Preparation

The preparation stage is often one of the most important parts of a successful transaction. This will include considering whether the proposed transaction is intended to be structured as a share sale, an asset sale, or another form of sale arrangement. This distinction should ideally be addressed at an early stage (in conjunction with your accountants or other advisers), as it can affect the price negotiation, tax treatment, due diligence process, employee consultation requirements, third-party consents and the drafting of the sale or purchase agreement. It will also be important to identify issues that can be addressed, reducing the likelihood of delays or difficult negotiations later in the process. We recommend involving your accountants and tax advisers at an early stage.

How to prepare a business for sale

A seller can add value before a buyer is ever approached. Buyers might expect at least three years of statutory accounts (if applicable) to review, so records should be accurate, current, and capable of being explained, and an independent valuation can help set a realistic asking price. It is then worth resolving anything a buyer might later treat as grounds to reduce that figure:

• Outstanding debts, overdue creditors, or informal loan arrangements with directors.
• Unresolved disputes with customers, suppliers, landlords, or former staff.
• For a share sale, gaps in the company books, such as unrecorded share transfers or an out-of-date register of members.
• Intellectual property created by contractors and never formally assigned.

In relation to a share sale, checking the constitutional documents of the target company matters just as much. Articles of Association and any shareholders’ agreement may contain pre-emption provisions, drag-along and tag-along rights, or consent requirements dictating how, and to whom, shares can be sold.

2. Confidentiality

Before confidential information is provided to a prospective buyer, it is usual for the buyer to enter into a Non-Disclosure Agreement (“NDA”). The purpose of the NDA is to protect confidential information relating to the seller’s business and to restrict the circumstances in which the buyer may use or disclose that information.

It is possible that the buyer may also wish to protect its confidential business by asking the seller to sign a similar NDA. The NDA should also deal with the return or destruction of information if the transaction does not proceed.

3. Heads of Terms

Once the principal commercial terms have been agreed, these are normally recorded in a Heads of Terms (sometimes referred to as a Letter of Intent).

The Heads of Terms will usually summarise matters, such as:

• the agreed purchase price;
• whether the transaction will be structured as a share sale or an asset sale;
• the proposed payment arrangements; 
• any deferred consideration or earn-out arrangements;
• the anticipated timetable; 
• possibly any period during which a seller agrees not to negotiate with other potential buyers (known as an exclusivity period).

The Heads of Terms may also address:

• price adjustment mechanisms;
• completion accounts;
• treatment of cash;
• debt and working capital;
• employee arrangements;
• property issues;
• whether any part of the consideration is conditional on future performance.

Although much of the Heads of Terms is not legally binding, certain provisions – particularly those relating to confidentiality and exclusivity – may be legally enforceable. It is important that the Heads of Terms do not unintentionally commit you to a particular legal or tax structure before full advice has been taken.

4. Buyer’s Due Diligence

The buyer will usually carry out detailed investigations into the seller’s business before committing to the purchase. This process, known as “due diligence”, allows the buyer to understand the legal, commercial, financial and operational aspects of the business and to identify any risks. A seller should expect to receive a detailed list of questions and requests for information and documentation.

These may relate to, amongst other things: 

• the ownership and structure of the company;
• key customer and supplier contracts;
• employees and service agreements;
• property interests;
• intellectual property;
• regulatory compliance;
• disputes or litigation;
• Insurance;
• tax matters.

It is important that all responses to due diligence enquiries are accurate and complete.

The three strands of due diligence

Investigations run in parallel. Commercial due diligence enquiries test the trading rationale and market position, financial due diligence verifies that the numbers support the price offered, and legal due diligence examines title, contracts, and compliance, feeding directly into the warranties negotiated later.

Alongside any due diligence questionnaire from the buyer (for the seller to complete), a buyer may often commission searches at Companies House, the Land Registry, and the intellectual property registers, together with insolvency checks against the company and its directors.

Depending on the size of the task (and the amount of documentation provided by the seller in answering due diligence requests from the buyer), documents and responses might be exchanged through a virtual data room, which creates an audit trail of what was made available.

5. Employees and Pensions

6. Key Contracts, Property and Consents

A sale may require consents from third parties, including landlords, lenders, customers, suppliers, licensors, franchisors or regulatory bodies. Identifying these issues early can be important, as third-party consent processes can affect the transaction timetable.

When might regulatory clearance be required?

Regulated businesses face an additional layer – eg. firms authorised by the Financial Conduct Authority are subject to change in control approval. Certain permits cannot transfer on an asset purchase at all, meaning the buyer must apply afresh.

Sensitive sectors carry a further requirement. Under the National Security and Investment Act 2021, acquisitions across seventeen specified areas – including defence, artificial intelligence, advanced materials, and energy – must be notified and cleared before the deal closes. Completing without clearance renders the acquisition void and is a criminal offence, so screening belongs early in the timetable. Larger deals with overlapping activities may also attract scrutiny from the Competition and Markets Authority.

7. Negotiating the Sale Agreement

The principal transaction document is usually the Share Purchase Agreement (“SPA”) for a share sale or, in the case of an asset sale, an Asset Purchase Agreement (“APA”). This document sets out the legal terms upon which the business or company will be sold and will cover matters including:

• precisely what is being sold;
• the purchase price and payment mechanism;
• completion arrangements;
• warranties the seller will give about the business;
• indemnities where specific risks have been identified;
• limitations on the seller’s liability;
• and any obligations that continue after completion.

The negotiation of the SPA or APA is often the most detailed and time-consuming stage of the transaction. Depending upon the nature of the transaction, additional documents may also be required, including consultancy agreements, service agreements, restrictive covenant agreements or transitional services agreements.

A seller will seek to negotiate appropriate limitations on its liability, including financial caps, time limits, minimum claim thresholds, conduct of claims provisions and exclusions for matters fairly disclosed to the buyer. A buyer will seek to obtain protections from the seller (through the warranty process) and also restrictions on the seller from competing with the business post-completion for a period of time.

How the purchase price is structured

Consideration may be settled entirely in cash on completion, or split between an initial payment and deferred instalments, loan notes, shares in the buyer, or an earn-out linked to future performance.

Are restrictive covenants enforceable?

Courts will generally uphold a restriction on a departing owner where it protects the goodwill the buyer has paid for and goes no further than reasonably necessary in duration, geographical reach, and scope of activity.

8. Warranties, Indemnities and Disclosure

One of the principal ways in which legal risk is allocated (in the sale or purchase agreement) between buyer and seller is through warranties and indemnities. Warranties are contractual statements made by the seller regarding the condition of the target business. They are intended to give a buyer confidence that the information provided during due diligence is accurate and complete. If a warranty proves to be inaccurate and the buyer suffers loss as a result, a buyer may be entitled to bring a claim against the seller.

Where specific risks have been identified during due diligence (for example, an ongoing dispute, an unresolved tax issue or an environmental liability), a buyer may also seek an indemnity. Unlike a warranty claim, an indemnity generally provides compensation on a pound-for-pound basis if the identified liability materialises. The parties will negotiate the level and extent of warranties and indemnities to be provided in the SPA or APA.

The seller will usually prepare a Disclosure Letter, which identifies matters that qualify the warranties given in the SPA. The Disclosure Letter is one of the most important documents in the transaction for a seller because it qualifies those warranties by identifying matters already known to the buyer. Preparing the Disclosure Letter requires careful consideration of the business and the information already disclosed during due diligence (if a matter is properly and fairly disclosed, the buyer will usually be prevented from bringing a warranty claim in respect of that matter).

Limits on a seller’s liability

Disclosure operates on two levels: general disclosures cover categories of publicly available information (and sometimes the contents of the data room), while specific disclosures address individual warranties provided by the seller in the purchase agreement. Buyers increasingly resist blanket data room disclosure, arguing that burying a problem among thousands of documents is not fair disclosure at all. The limitations attached to seller liability then follow a recognisable pattern:

• An overall financial cap, frequently set at the purchase price and sometimes lower for general warranty claims.
• A de minimis figure, below which an individual claim cannot be pursued.
• An aggregate threshold, which qualifying claims must exceed in total before any becomes payable.
• Time limits, commonly twelve to twenty-four months for general warranties, with up to seven years for tax.

9. Tax and Financial Matters

Tax advice should be co-ordinated with your accountants and/or tax advisers. The tax treatment of the sale or purchase can differ significantly depending on whether the transaction is structured as a share sale or an asset sale. Matters that may require specific tax input include:

• the availability of any business disposal relief;
• corporation tax;
• VAT treatment (including whether the transaction may qualify as a transfer of a going concer)
• stamp duty on shares;
• stamp duty land tax on property interests;
• treatment of loan accounts;
• extraction of cash;
• deferred consideration;
• earn-out arrangements.

Financial matters such as completion accounts, working capital adjustments, cash-free/debt-free pricing, accounting adjustment mechanisms and retentions should also be considered carefully.

10. Signing the Transaction Documents

Once the transaction documents have been agreed, the parties will proceed to signing. In some transactions, signing and completion occur simultaneously. In others, there may be a period between signing and completion whilst certain conditions are satisfied, such as obtaining regulatory approvals or third-party consents. Where there is a gap between signing and completion, the sale or purchase agreement will usually contain obligations regulating how the business is to be operated during that period. These are commonly known as pre-completion undertakings.

Each condition should be objectively worded, with responsibility allocated for satisfying it and a long-stop date after which either party may withdraw. The undertakings themselves typically prevent a seller from changing terms of employment, disposing of assets, declaring dividends, or entering into material contracts without agreement.

11. Completion

Completion is the point at which legal ownership of the business or company passes to the buyer. On completion, the purchase price is usually paid or otherwise satisfied in accordance with the agreed payment mechanism (subject to any agreed adjustments), shares or assets are transferred, directors may resign or be appointed, and the parties exchange the remaining completion documents.

Completion day checklist

Meetings are now usually held virtually, with documents signed electronically and held to order until funds clear. A few practical items are easily overlooked, yet each can hold matters up:

• Resignation letters from outgoing directors, containing a waiver of any claim against the company.
• Release of debentures, fixed and floating charges, and personal guarantees given to the company’s bank.
• Repayment or formal waiver of directors’ loan accounts, in whichever direction they stand.
• Handover of bank mandates, accounting software access, domain names, and social media accounts.

12. Post-Completion Matters

Following completion, a number of administrative and legal matters remain to be completed. These may include:

• updating the company’s statutory registers;
• making any necessary Companies House filings;
• dealing with stamp duty on share transfers;
• implementing purchase price adjustments or completion accounts;
• addressing any deferred consideration or earn-out arrangements.

In an asset sale, post-completion matters may also include contract novations, property registrations, intellectual property assignments, employee transfer steps, customer or supplier notifications, and release or discharge of any security where applicable.

A seller may also have continuing obligations under the sale agreement, such as restrictive covenants, confidentiality obligations, assistance with handover, consultancy arrangements, earn-out obligations or obligations relating to completion accounts.

Reach Out to GoodLaw

Our corporate and commercial team advises buyers and sellers throughout the property transaction.

To discuss a proposed acquisition or exit in confidence, please contact us. An early conversation, before Heads of Terms are signed, is usually the most valuable one you will have.

This summary is published for general information purposes only and is intended to provide a general overview of the subject matter discussed. It does not constitute legal advice and should not be relied upon as legal advice or as advice in relation to the acquisition, disposal, purchase or sale of a company or business or any other transaction.