Selling your business is more than finding a buyer and signing a deal. Before you can market your company, you need to ensure its legal foundation is airtight. Buyers will look for red flags — and if they find them, it can lower your valuation, slow negotiations, or even derail the deal entirely.
By addressing legal issues well in advance, you not only reduce risk but also present your business as well-run and ready for a smooth transition.
Review and Optimize Your Contracts
Your contracts — from customer agreements to vendor relationships — will get close scrutiny in due diligence. Take time to:
- Confirm all parties’ names and details are correct.
- Ensure terms and conditions are clear and complete.
- Fill in any missing details in templates.
- Avoid vague or one-sided clauses that might scare buyers.
- Revise vague or “friendly” terms with related companies.
Watch out for red flags:
- Clauses allowing the other party to change terms without your approval.
- Automatic renewals without notice.
- Overly broad exclusivity or restrictive terms.
- Harsh penalties or one-sided indemnities.
Pay close attention to change of control provisions. These clauses can give a customer, supplier, lender, or landlord the right to end or renegotiate a contract if your business changes hands. If a key agreement contains one, work to amend it or at least keep good relations with the counterparty so it is easier to get consent when needed.
If you have contracts with related parties — like family-owned entities or other businesses you own — make sure they’re on normal commercial terms. Buyers will want to see that all agreements make sense in a standard market context. Plus, sometimes those agreements give favorable terms you do not want to provide to a new buyer.
Secure Intellectual Property (IP) Rights
For many companies, intellectual property is one of their most valuable assets. This includes patents, copyrights, trademarks, and trade secrets. Buyers will want to confirm that your company — and not an employee or contractor — owns them outright.
Steps to take:
- Review employee agreements to ensure they include clear IP assignment clauses.
- For contractors, include “work for hire” language.
- If gaps exist, secure written assignments now — before a buyer’s due diligence uncovers the issue.
Why it matters: Unclear IP ownership can kill a deal. If a critical patent or piece of software is still owned by a former employee, a buyer may walk away or demand a steep discount.
Understand NDAs and Non-Competes
Buyers usually require sellers to agree not to compete with the business for a certain period and in a certain region after the sale. These non-compete agreements protect the buyer’s investment and the goodwill they’ve purchased. Remember that not all states allow non-compete agreements.
To keep them enforceable:
- Limit the time frame to what’s reasonable for your industry (often 1–5 years).
- Keep the geographic area relevant.
- Clearly define what activities are restricted.
- If a non-compete agreement is illegal in your state, consider strong confidentiality provisions that protect your confidential information from misuse.
Also, use Non-Disclosure Agreements (NDAs) early in the sale process to protect sensitive information you share with potential buyers — such as customer lists, pricing strategies, and proprietary processes. Consider timing the buyer’s diligence to only provide customer lists and other highly sensitive information after a term sheet has been signed and you are closer to closing.
Update Corporate Governance and Compliance
Buyers will examine your corporate records to ensure they’re current and accurate. Review and update:
- Articles of incorporation or organization.
- Bylaws, shareholder agreements, or operating agreements.
- Buy-sell agreements.
- Partnership agreements.
Make sure all required business licenses and permits are up to date and that your company is in good standing with regulators. Compliance lapses — from expired licenses to overlooked filings — can delay or even derail a sale.
Why Early Legal Preparation Pays Off
Legal preparation isn’t just about avoiding problems — it’s about enhancing value. Instead of a seller who can’t even keep their business in good standing, a buyer who sees clean contracts, clear IP ownership, and well-organized records is more likely to pay top dollar and close faster. You’ll also be in control of the narrative, addressing potential concerns before they become negotiation sticking points.
FAQs
Q: How far in advance should I start legal preparation before selling?
A: Ideally, 12–24 months before you plan to sell. This gives you time to fix issues and position your business for the best valuation.
Q: What’s the biggest legal mistake sellers make?
A: Overlooking change of control clauses. Losing a key contract because of one can significantly reduce your company’s value.
Q: Do I need to redo all my contracts?
A: Not necessarily — but you should review them for clarity, completeness, and transferability.
