Buying or Selling a Business? The Legal Traps That Cost You Later

The commercial negotiations of buying or selling a business often orbit around a price point. However, the legal framework surrounding this transaction is, if not equally, more important than the price itself. Without proper legal grounding and careful due diligence, parties may face significant liabilities and delays that can result in costly disputes.

The Type of Sale a Business Engages In

One of the key legal decisions in the sale of a business is whether the transaction is structured as an asset sale or a share sale. The distinction between these is vital, as it determines which rights and liabilities are transferred to the buyer.

In an Asset Sale, the buyer engages in a transaction with the seller that allows them rights over specific assets such as equipment, intellectual property, stock, and goodwill (including reputation). Due to acquiring the assets only, the buyer will generally not assume the business’ liabilities, unless this is expressly stated in the contract.

In a Share Sale, the buyer acquires shares in the company, meaning the business continues to operate in its usual manner. This includes all of its existing obligations, such as contractual liabilities, debts, and even potential legal claims. By entering into a share sale, the buyer is effectively acquiring the business as a whole. Without careful legal advice, due diligence, and proper contractual assessment, the buyer may unknowingly assume significant liability.

Deposits and Settlement

Business contracts usually require the buyer to pay a deposit towards the purchase of the business. However, where the transaction does not proceed, there is often confusion regarding what happens to that deposit.

Contracts typically include conditions for completion, such as finance approval, due diligence, or landlord consent to lease. The way these clauses are drafted will determine whether the deposit is forfeited or refunded if the contract is terminated.

By engaging a legal team early in the process of a business sale, the transaction can be drafted and structured appropriately. This ensures the contract aligns with your interests and that potential risks are identified before signing.

Buying or selling a business is a significant financial, legal, and personal decision. Seeking legal advice should not be viewed as an additional step, but rather as an essential part of protecting your position.

At Zanier Legal Services, our Commercial Law team works to ensure your interests are protected from the outset, risks are properly managed, and your transaction proceeds as smoothly as possible.

If you are considering buying or selling a business, we strongly recommend obtaining advice before you commit to any agreement. A properly structured transaction today can prevent costly disputes tomorrow.