Legal Considerations When Selling Your Business: A Guide for Business Owners Planning to Exit

It is never easy for anyone to part with a business, especially one which they have built up from scratch. Without a second generation to handover the reins of the business to, such owners are often not just looking for financial gain but seek buyers with the requisite resources and expertise, who are committed to continuing the growth and legacy of the business.

This article seeks to address the legal concerns of such business owners who have built up their business over the years and would now like to retire and exit the business, and perhaps monetise the fruits of their labour.

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Business Sale Structure: Share Sale vs Asset Sale – What’s the Difference?

In a sale of 100% of the shares of a company, the entire assets and liabilities of the company are transferred. There is no need for separate treatment of and transfers of the underlying assets of the company.  

Conversely, in a sale of assets of the business, buyers will specify the specific assets comprising the business which they are intending to acquire. Depending on the classes of assets being acquired, separate transfer procedures will be required for each class of asset.

Generally, a share sale is more straightforward from the perspective of a seller looking to exit the business. Unlike in an asset sale, the seller will also not be saddled with the administrative work and costs of disposing of the remaining assets and closure of the company.

What Happens After the Sale? – Understanding Post-Sale Obligations

A buyer may request a seller to stay on in the business as an employee or consultant for a period of time post-sale to facilitate a smooth handover of the operations of the business. It is critical that the terms of such employment/consultancy should be negotiated and agreed upon prior to the completion of the sale.

Warranties vs Indemnities – What Every Seller Needs to Know

A buyer will often require a seller to provide warranties in relation to the business being acquired. In this regard, it is crucial for a seller to respond with disclosures which serve to qualify the warranties being provided. For example, where there is a warranty that the company has not been involved in any litigation for a certain period of time, the seller should provide a disclosure with details of past disputes if it has in fact been involved in one during the stipulated period. This serves to limit the extent of warranty made.

Where a warranty subsequently proves to be false and there is a breach of warranty, a buyer is entitled to claim damages for losses suffered by it arising from the breach. To make a claim for damages, certain factors need to be shown including the fact that the buyer has indeed suffered a loss caused by the seller's breach and that the loss claimed is not too remote. The buyer must also show that it had taken steps to reduce its loss.

Aside from warranties, a buyer may sometimes request for indemnities to be provided by a seller. An indemnity is a promise by the party giving the indemnity to protect the recipient of the indemnity against an identified loss, by paying money if a specified event occurs. It is often sufficient to show that the specified event had occurred, without the need for the requirements in a claim for damages for losses suffered arising from a breach of warranty.

Given the lesser requirements involved in making a claim under an indemnity, a seller should resist the giving of indemnities as far as possible. Where nonetheless given, a seller should ensure that the scope of the indemnity is drafted tightly.

Limiting Your Liability as a Seller in relation to warranty claims

A seller can seek to limit its liabilities contractually for breach of warranty claims through negotiated limitations. This could include for example, limitations on quantum of claim and time period during which a claim may be made. Procedural requirements could also be put in place regarding the manner of the making of the claims. Further specific limitations may be negotiated for by the seller, depending on the circumstances. 

Need Legal Help With Your Business Sale? Contact Our Team

Having represented business owners who had built up their businesses and were looking to sell their shares/assets as part of their retirement plan, we understand the considerations of such owners and are well placed to assist legally in structuring their exit in a manner that seeks to achieve their twin aims of the continuation of a business legacy whilst minimising their post-exit liabilities. If you require legal assistance in the sale of your shares in a company or the assets in your business, please feel free to contact our directors Diana The or Angeline Wong.