There is real value in a seller being ready for a buyer’s lawyers before the business ever goes to market.
There is a lot to be gained from having a seller ready for due diligence before it starts. The owner who has tidied up the paperwork goes to market clean, holds the buyer’s confidence through the process, and keeps the deal moving, instead of watching it stall while everyone argues about who carries the risk. The owner who has not is fixing problems mid-deal, under time pressure, with the other side watching. In this article we go through 6 contract items worth getting a seller across before they list. They are not the only things that matter, there is plenty outside the contracts too, things like intellectual property and employment law compliance, that we will come back to in future articles. The contracts are simply where a buyer’s lawyers start, and where a clean-looking business most often comes unstuck.
When we help owners get ready to sell, the same 6 contract problems come up again and again, and every one of them is cheaper, faster and easier to fix before the business goes to market than in the middle of a live deal. The broker who knows what they are, and raises them early, is the one who keeps the deal whole and the fee intact. Here they are, roughly in the order that matters most to a buyer.
1. The people who can walk out with the value
In a lot of sales, what the buyer is really paying for is the team and the relationships they hold. Then the buyer’s lawyers open the employment contracts and find no restraints, no confidentiality obligations, and nothing assigning to the company what those people create.
That last one catches sellers out more than any other. There is a persistent myth that if you pay someone to make something for you, you own it. For an employee, that is usually right. For a contractor, it is usually wrong. Unless there is an agreement that assigns the intellectual property to the business, the contractor who built the software, the designs or the brand most likely still owns the underlying rights, and could walk off and use them with a competitor. If the thing the buyer is paying for was built that way, the seller may not fully own it. Fixing it mid-deal means going back to those individuals and asking them to sign, at the exact moment they have the most power to say no, or to name a price.
2. The lease that runs out before the buyer’s payback does
For a business tied to its premises, the lease is part of what is being sold, and a short one frightens a buyer.
We saw this with a business acquiring a dental practice. Their previous lawyer had charged a good sum to review and negotiate the lease assignment, but had never flagged that the options had run out and the lease had less than a year left to run. When the buyer went to organise finance, the bank blocked it, because the lease term was too short to support the value of the business being sold. Worse, the bank found a demolition clause buried in the lease, allowing it to be ended with three months’ notice. The reason turned out to be exactly what it sounds like: the building was going to be demolished. A lease problem nobody had looked at almost sank the whole deal.
A lease that is simply too short can also shrink the pool of buyers able to come to the table at all, which is the broker’s problem as much as the seller’s.
3. The contracts and structures in the wrong name
The trading company signed some agreements. The owner signed others personally, years ago, before the current structure existed. A few are still in the name of an old entity that no longer trades. The way the business is owned today may also no longer be the way that gets the best result on a sale.
Each of those has to be found, untangled and moved across before completion, at the seller’s cost and on the buyer’s timetable. We see owners arrive at a sale having “prepared” for years, only to discover at the table that the structure they sit in costs them dearly, and that by then it is too late to change cleanly. Approached early, almost all of this can be sorted easily. Left until a buyer is in the room, it becomes expensive, or it becomes a problem the seller simply has to live with.
4. The personal guarantees that follow the owner out the door
Over the years, most owners have signed personal guarantees without thinking much about them. They are a standard requirement of leases, of finance, sometimes of supplier accounts. The trap is that they do not automatically end when the business sells.
If a guarantee is not properly extinguished as part of the sale, and the buyer later stops paying the rent or defaults on the finance, the other side can come after the seller personally, for a business they no longer own. They may have a right to chase the buyer under the sale contract, but that is a fight nobody should have had to be in. Every personal guarantee needs to be found and dealt with before completion, and some take longer to release than others, which is exactly why this is worth raising while there is still time.
5. The revenue with no contract behind it
Plenty of good businesses run on long-standing arrangements that were never written down. The customer has been there 10 years, everyone is happy, nobody ever needed a document.
A buyer cannot pay for loyalty they cannot verify. Revenue with nothing behind it gets treated as revenue that might not survive the sale, so it is discounted, made conditional, or covered off with money held back until those customers prove they are staying. If a meaningful slice of the income is on a handshake, expect the buyer to treat it as though some of it will walk. For a listing, that is the difference between the headline multiple and what actually settles.
6. The contracts that need someone else’s permission
Many customer and supplier contracts, and almost every lease, carry a change of control clause. It lets the other side ask for their consent before the business changes hands. In the lead-up to a sale we pick these clauses up and get the consents as part of the process.
The one thing worth doing early is this. If a key contract has a change of control clause the seller would rather not have there at all, the time to take it out is at a renewal, when the whole contract is being negotiated anyway. Asking a customer to strike out only that one clause, on its own, can signal that the owner is thinking about selling.
What this actually costs the deal
What these problems really do is erode the buyer’s confidence in the business, and a less confident buyer protects themselves through the deal terms. That means tighter warranties and indemnities, more of the price held back in a retention, or a bigger slice pushed into an earn-out the seller only collects if the business performs after they have left.
The numbers add up quickly. If a buyer holds back 10% of a $2M sale against a risk their lawyers found, that is $200,000 of the seller’s money sitting in someone else’s account, sometimes for years, and released only if nothing goes wrong. For the broker, the same risk is a softer price, a longer settlement, and a fee that moves with both. Fixing the problem a year earlier would usually have cost a small fraction of that.
Why the broker who raises this early wins
Getting a lawyer in once a buyer is at the table looks like a handbrake. Getting one in while the business is being prepared looks like good advice, and it is the broker who arranged it. Every problem above is fixable cheaply, and on the seller’s own timetable, right up until the day a buyer’s lawyers find it first. After that, the seller is fixing it under time pressure, with the other side watching, and the negotiating power sits with everyone except them.
If you have a client who is 1 to 2 years from selling, this is the moment a Ready to Exit Consultation earns its place. We look at the business the way a buyer’s lawyers would, contracts included, and hand back a clear list of what to fix and in what order. The seller goes to market clean, the deal holds its value, and you are the broker who saw it coming.
Just point them our way, or book in a call and we will take you and your client through how it works.
