The Top Mistakes When Buying or Selling a Business: What You Need to Know

The Top Mistakes When Buying or Selling a Business: What You Need to Know

One of the most significant pitfalls in this process is rushing the transaction. This doesn’t mean a deal can’t be done quickly under the right circumstances, just that cutting corners can lead to costly mistakes and unforeseen liabilities. Corporate Solicitor, Max McGenity, explains the importance of conducting thorough due diligence, engaging with the disclosure process, and properly negotiating and agreeing Heads of Terms. By taking the time to address these crucial components, both buyers and sellers can protect their interests and have a smoother transaction experience.

The Buyer: Due Diligence

From the buyer’s perspective, a key mistake is rushing the due diligence process. If you’re acquiring a company or business that you don’t know much about, if you don’t do your due diligence then you might be signing yourself up for more liability, more problems or simply something different than you initially thought.

It’s likely you want to know about matters such as the financial health of what you’re buying, who its customers are and what key contracts it has. If your due diligence flags any issues, you’ll be able to factor them into the purchase – that might mean reducing your purchase price, getting an indemnity from the seller in relation to the specific issue, various contractual protections or even stepping away from the deal. The due diligence process is there to reduce the ‘buyer beware’ aspects of a purchase, so make the most of it.

The Seller: The Disclosure Process

From a seller’s perspective, it’s important to disclose everything relevant about the business or company.

As part of the sale process, the seller makes warranties which are statements about the state of the company or business you’re selling. How many warranties you’ll have to make depends on what the buyer wants to know about. These tend to be – understandably – quite extensive.

You as the seller have the opportunity to disclose information that goes against these statements qualifying the warranties you’ve made. For example, if you’re selling a company and you’ve warranted that there are no current claims when there actually is a claim ongoing, you can disclose this to the buyer.

If a warranty is found to be untrue down the line, the buyer will want to make a claim for breach of said warranty. If you’ve already made the disclosure and this has been accepted by the buyer, they can’t make a claim for this and you’re protected.

If you haven’t said anything with the intention of pushing the deal along or brushing it under the carpet, you’re opening yourself up to a claim after completion that could have been avoided by fully engaging with the disclosure process.

Both Parties: Drawing up Heads of Terms

Heads of Terms ‘HOTs’ set out the main preliminary points that the parties agree on going into the deal such as the price, timelines, responsibilities.

They serve as a framework for the transaction. They ensure all parties are aligned and clear on the headline positions before proceeding. Without having headline points agreed at the outset, there’s a risk of misunderstanding, wasted time or disagreements later down the line.

Investing that little bit more time at the start of the transaction and agreeing HOTs can actually save you far more time and stress in the long run.

If you need assistance in any aspects of buying or selling a business, please get in touch with our mergers and acquisitions lawyers via corporate@mlplaw.co.uk