Selling a Business – Common Pitfalls

Selling Businesses

The Common Pitfalls When Selling a Business and How to Overcome Them

Selling a business is a detailed and often complicated process. The pitfalls on the road to a successful completion can manifest themselves in a variety of ways, depending on the particularities of the company involved. At Continuum our experienced corporate lawyers are always pro-active during the pre-sale stage, aiming for early identification and resolution of any possible issues before they can impact the completion timetable.

One of our Trainee Solicitors, Callum Giliker, shares some of his experiences of roadblocks to the successful completion of a sale – complicated share histories, ownership of website domains and property matters – and how the firm has navigated these.

A Complicated Share History Needs to be Clarified When Selling a Business

At various times while assisting with a sale of shares, it has become clear that the history and movement of shares – both to current and previous shareholders – is far from simple. In most cases the buyer will be purchasing the entire issued share capital of the company and they will want to be certain that what they are buying under the Share Purchase Agreement does, in fact, belong to the “shareholders”.

I have never encountered a sale where the purported share history is incorrect, but there have been instances where the waters were somewhat muddied, e.g. by conflicting or incomplete statutory records and Companies House filings. In such circumstances a buyer’s solicitors will usually seek for the uncertainty to be resolved and, if not possible, will ask for an indemnity from the sellers.

One share sale in particular, in which I assisted as a Corporate Paralegal, had an interesting and ambiguous share history. Long before the sellers were shareholders, an individual had been entered into the statutory records, but then disappeared from both statutory records and Companies House records with little to no explanation. As the current sellers had not been involved in the business at the time, it proved difficult to substantiate the suspected position: that he had never been a shareholder at all, but had confused his directorship for having a legal share in the company. The individual had long since left the country and was not contactable.

The truth of the matter was eventually established by getting hold of older records, and organising the chronology of events. Once we had done this, the sellers were happy to give an indemnity in respect of their shares to the buyer after reviewing the available documentation, as they were confident that their shares were fully and legally owned.

This matter highlighted the importance, when selling a business, of a company ensuring that, throughout the history of the company’s share history, the statutory records and Companies House filings are kept up to date and reviewed regularly.

During the pre-sale period or early transaction stages, we will often pull together, from available resources, a timeline of share transfers, and identify any inconsistencies. If these are identified early enough, we can begin the process of ameliorating any mistakes and clarifying the ownership status. We will often, too, reconstitute a company’s statutory books where these have not been maintained, ensuring compliance with the Companies Act 2006.

Websites as Assets. Who Owns the Domain?

When the process for selling a business starts, it is not uncommon, while conducting a detailed due diligence review, for us to find that the domain for a company’s website is not owned by the company for sale, but instead owned by an employee or IT consultant. The employee or consultant will technically be listed as the ‘registrant’, rather than the company itself. While this is fine during the company’s usual business life, it is important to note that any assets – including web domains – which are not legally owned by the company will not necessarily transfer with the company on a sale, especially where the IT consultant is not intended to be retained after the sale.

Quite often, businesses will have a lengthy list of domains that they own, many of which are ‘redirect’ domains intended to take a visitor to their main site. With a litany of different domains, often with an external consultant acting as caretaker, it is easy to see why their ownership might be forgotten. When selling a business, however, this area becomes very important.

We conduct a thorough ownership review of all the websites, provided that we are given the requisite information, to identify any potentially problematic domains at an early stage. While the necessary transfer usually involves payment of a nominal fee and the completion of a short online form through an online portal, there have been times where an IT consultant – gatekeeper of the technical information – has been unavailable in the lead up to completion, causing concern that the domains would not be transferred in time.

We advise all clients and prospective clients to either have all the information (including passwords) available, or to ensure that their IT advisers will be available to liaise with us and effect any necessary re-registrations.

Property Matters – Avoid Hidden Liabilities and Costs

For a prospective buyer, the selling company’s property can be a source of massive interest or concern: a problem-free property that facilitates the needs of the business can be a selling point and can dovetail with a buyer’s post-acquisition plans. However a property with hidden liabilities and costs is something that a buyer will want to avoid, especially since some property-related liabilities can be very expensive indeed. To combat this, buyer’s advisers will often be very thorough in their property queries and investigations.

Usually this is no problem at all – sellers are able to be transparent and reassuring in response to all queries – but there are times when information is not readily available. We have been instructed on selling a business where the company has a lease to its property, and as such does not have access to information surrounding the landlord’s interests: full building insurance policies; asbestos reports and other environmental surveys, etc.

In some cases the sellers are cautious about contacting the company’s landlord, as the landlord would not be under any obligation of confidentiality in relation to the reasons behind the information request. Quite often the way forward is for information to be provided as far as possible, and then for us to guide the sellers through the completion of ‘Commercial Property Standard Enquiries’ which are designed to flush out important details in relation to the property.

These can be time-consuming, but a comprehensive set of CPSE responses can often allay a buyer’s fears and worries about the company’s property situation.

Contact us for Help and Advice With Selling a Business

As the above examples show, pitfalls on the road to a successful completion can manifest themselves in a variety of ways, depending on the particularities of the company. At Continuum our approach is to be pro-active during the pre-sale stage so that we can identify any issues as early as possible and deal with them. This allows us to get the deals we work on over the line as quickly and efficiently as possible.

Contact us or call us on 0121 214 2490 if you are selling a business. The initial discussion is FREE.