Whether you intend to sell your business or cease operations completely, various obligations need to be met to ensure a smooth transaction, while safeguarding the interests of both buyer and seller. Let’s consider some of these legalities in more detail.

Deciding to sell and preparing for sale

Before any formal steps are taken, the decision to sell a business often involves evaluating its market value, financial standing and future prospects. Preliminary steps usually include working with solicitors and accountants specialising in commercial sales, each covering legal and financial matters respectively.

One basic element that also needs clarifying before proceeding is determining who owns the business. While this may seem obvious, it may not be that simple. For example, if the commercial operation is overseen by someone hands-on but under a limited company structure, the shares may not be owned by the same people as the director(s). There could also be a group of minority shareholders who all need to consent to the sale and formally vote it through. 

Some entrepreneurs put businesses in the name of a spouse or children for tax or other reasons. These legal owners will have to sign off on any sale, so they cannot be taken for granted. In addition, there may be bank securities or other lender issues to be understood and accommodated, so a solicitor needs to know the full ownership structure.

What is the business worth?

While the sale may be predicated on a successful retirement, there are various other reasons to sell a business, including debt, illness, age, family pressure, competitor pressure and more. A solicitor needs to know (either from the client or the accountant or a business consultant) what the true value and likely price will be, as this will inform or dictate tactics, to a great extent. It also needs to be clear what can be disclosed to the buyer or the buyer’s lawyers - and what should be kept back.

Once the value has been clarified, the sale can then be structured - either as a share sale (selling the ownership shares in the company) or an asset sale (selling individual assets of the business, such as property, stock, equipment, and contracts). In Scotland, the structure impacts the tax treatment and liabilities for both parties.

Due diligence

This is one of the most crucial stages in any business sale, which sees the buyer investigate a business’s financial health, liabilities, assets, and legal status to assess its overall value and risks. Sellers must prepare and disclose pertinent information, often with the help of a solicitor, to assist with this process.

Financial records, including profit and loss statements, tax returns, outstanding debts and loan agreements must all be accurately disclosed by a seller. Doing so is essential for legal compliance, as well as avoiding potential disputes. Furthermore, in Scotland, businesses may require specific licences or adhere to particular industry regulations. Non-compliance with these legal standards can delay the sale or even deter potential buyers.

Buyers will want to review any existing contracts, including customer agreements, supplier contracts and leases. They also look for contingent liabilities, such as potential lawsuits, that might impact the business post-sale.

Due diligence can be a lengthy and meticulous process, requiring the seller’s full cooperation to ensure a smooth transaction. As a result, legal advisors usually draft a non-disclosure agreement (NDA) early in proceedings, to protect any sensitive business information.

Drafting and negotiating the sale agreement

The sale agreement is the core document when selling a business. It outlines the terms and conditions of the transaction, including the purchase price and payment terms. This price may be paid upfront, in instalments, or through an earn-out agreement, where the seller receives payments based on the future performance of the business.

Warranties and indemnities are another part of the sale agreement; the former are statements of assurance about the business's state, made by the seller to protect the buyer from unexpected issues. Indemnities, on the other hand, are specific assurances that compensate the buyer if particular risks materialise. These clauses are usually a focal point of negotiation, as the seller aims to limit liability, while the buyer seeks maximum protection.

When selling a business, sellers are often required to give restrictive covenants in the sale contract. These will prevent them from setting up a competing company, as well as poaching staff and customers. Buyers will be heavily reliant on these covenants to protect the goodwill of the business.

Plus, some sales are conditional on certain events or confirmations, such as regulatory approvals, transfer of specific contracts, or financing. These conditions must be fulfilled before the sale is completed.

As the sale agreement is legally binding and requires meticulous drafting, it’s advisable for both parties to have legal representation to protect their respective interests.

Employment law considerations (TUPE regulations)

In Scotland, employee rights are protected under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). When a business is sold, employees’ contracts are transferred to the new owner, safeguarding their rights and terms of employment. TUPE ensures that employment terms, benefits, and working conditions remain unchanged under the new ownership.

However, TUPE applies differently depending on whether it’s a share sale or an asset sale. In a share sale, employees remain under the existing contracts as they continue working for the same legal entity. By contrast, in an asset sale, TUPE’s protections are especially relevant as employees will transfer to the new business entity.

In addition, employers are required to inform and consult affected employees about the transfer, including details of the transfer and any changes. Failing to adhere to this requirement can lead to legal disputes and potential claims by employees.

Intellectual property and goodwill

For many businesses, intellectual property (IP) is a valuable asset. Therefore, the seller should ensure any intellectual property rights (IPR), including trademarks, patents, copyrights, and trade secrets, are formally registered and legally protected. If they are to be transferred to the buyer, it’s essential to include a clause in the sale agreement detailing the transfer and any associated warranties.

Similarly, goodwill represents the intangible value of the business, such as brand reputation, customer relationships and market presence. Valuing goodwill can be challenging - and it may be reflected in the purchase price as a standalone value or merged with other assets.

Tax considerations

Taxation is a critical aspect of any business sale - and understanding the tax implications is essential for both parties. Some key tax considerations include Capital Gains Tax (CGT), which sellers are typically liable for on the sale’s proceeds, although it varies depending on whether it’s a share sale or asset sale. Scotland applies UK tax rules, including possible reliefs such as Business Asset Disposal Relief (BADR), which can reduce the tax rate if certain conditions are met.

Some business sales may attract VAT (Value-Added Tax), depending on the nature of the assets being transferred. In many cases, a Transfer of Going Concern (TOGC) can make the sale VAT-exempt if the business continues to operate as before under the new ownership.

For share sales, the buyer may also be liable for Stamp Duty on the purchase of shares, while asset sales typically do not attract this tax. Given these factors, buyers and sellers should work closely with tax advisors to ensure compliance and explore potential reliefs to minimise tax liabilities.

Regulatory compliance and environmental considerations

Depending on the industry, businesses in Scotland may be subject to specific regulatory requirements, including environmental and health and safety regulations.

For instance, certain businesses, like those in the food, healthcare, or financial sectors, require specific licences to operate. The seller must ensure that these can be transferred or re-issued to the new owner. Similarly, if the business involves manufacturing or deals with hazardous substances, environmental laws may impact the sale. In such cases, an environmental assessment may be required to determine compliance and assess any potential liabilities.

Failing to address regulatory issues can lead to fines, revocation of licences, or even legal action, potentially diminishing the business’s value - and affecting the sale.

Selling a business involves a series of legal considerations that impact both the seller and the buyer. As a result, enlisting experienced legal and financial advisors is critical for navigating the complexities of the transaction and ensuring a smooth process. Fortunately, with proper planning and adherence to Scottish commercial law, business owners can achieve a successful sale that meets their financial and strategic goals.