M&A
The Most Common Legal Mistakes Sellers Make When Selling a Business – and How to Avoid Them
Selling a business is a high-stakes transaction – legally, financially, and emotionally. Unfortunately, many entrepreneurs and small business owners make avoidable legal mistakes that can reduce the purchase price, create future liabilities, or in the worst case, derail the entire deal.
Here are the most common mistakes – along with concrete advice on how to avoid them:
Inadequate Legal Preparation for the Sale
A fundamental mistake is failing to dedicate sufficient time and focus to legal preparation. This often results in a range of structural deficiencies that a buyer will identify – potentially leading to a reduced valuation or even scaring them off entirely. Key consequences of poor preparation include:
Unclear ownership and financing structure
Unclear title and protection of intellectual property
Incomplete or poorly drafted contracts
Difficulty supporting the company’s valuation
How to avoid it:
Conduct a legal due diligence review before going to market. In general, a well-executed exit process requires 6–12 months of preparation (some would argue up to 24 months). Early preparation enables you to optimise operations and financials – for example, by demonstrating a lower working capital need – which can, in turn, support a higher valuation. You may also be able to influence EBITDA positively before year-end by pausing expansion plans or R&D investments, thereby demonstrating sustainable long-term earning capacity.
Clarify IP Ownership and Risks
Ensure that all intellectual property rights (logos, code, trademarks, etc.) are properly owned by the company. Review which IP assets are used in the business and whether there are any uncertainties regarding the company’s claims to those rights. Are you using any assets that might infringe on third-party IP, or do you rely on open-source components? If so, secure proper licences and take any necessary steps to ensure your IP does not inadvertently fall under open-source licensing requirements. Depending on the industry, IP may represent a major part of the company's value for a buyer.
Clarify Share Ownership and Agreements with Partners/Employees
In small to mid-sized companies, it's common for buyers (through their professional advisers) to uncover unclear ownership arrangements or even historical disputes regarding share allocations, promised equity, or improper or missing share certificates. These issues can be serious red flags for a buyer. Even if resolvable during the process, they can weaken the seller’s position in warranty and liability negotiations.
Keep Corporate and Personal Finances Separate
Ensure your bookkeeping and financing structures are in order, including a clear separation between the owner’s personal finances and the company’s. This applies both to small businesses owned by individuals and to mid-sized companies that are part of a larger group with intercompany transactions.
Prepare for Carve-Outs or Spin-Offs
If the transaction involves a carve-out or spin-off of a specific unit or group, identify and address dependencies between the part being sold and the rest of the business group early on. Structuring these dependencies in advance can significantly improve both the quality and valuation of the divestment.
Other Common Mistakes – That Can Be Costly for the Seller
Granting a long exclusivity period to a single buyer via a term sheet, which shifts negotiating power in favour of the buyer.
Failing to secure proper employment and consultancy agreements, including clear IP transfer provisions, which increases legal exposure and weakens your negotiating position.
Using template contracts from the internet for customer and supplier agreements, which are not tailored to your business. This can create unnecessary risk and make the company less attractive to buyers.
Agreeing to an earn-out with unclear or unverifiable calculation criteria, or worse, where the buyer has the ability to influence the outcome – leading to disputes or lost value for the seller.
Accepting absolute warranties, which significantly increases the risk of future claims from the buyer. (Remember: companies are typically sold “as is.”)
Signing a transfer agreement with no or inadequate limitations on liability, giving the buyer the ability to claim significant compensation for extended periods, should post-closing issues arise.
Accepting an overly broad or long non-compete obligation, which prevents the seller from operating within their area of expertise for an unnecessarily long time or in markets that don't actually compete with the sold business. (Note: competition law often restricts the duration and scope of non-competes.)
Summary
Selling your company is a major milestone – one that many only experience once or twice in a lifetime. Done right, and with an attractive business to offer, it can result in an excellent outcome. Done wrong, it can lead to price reductions, liability claims, or drawn-out disputes. My recommendation: always seek qualified legal advice – and do it early.
Author: Kat Strandberg
Stockholm, 2025-05-28
Inadequate Legal Preparation for the Sale
A fundamental mistake is failing to dedicate sufficient time and focus to legal preparation. This often results in a range of structural deficiencies that a buyer will identify – potentially leading to a reduced valuation or even scaring them off entirely. Key consequences of poor preparation include:
Unclear ownership and financing structure
Unclear title and protection of intellectual property
Incomplete or poorly drafted contracts
Difficulty supporting the company’s valuation
How to avoid it:
Conduct a legal due diligence review before going to market. In general, a well-executed exit process requires 6–12 months of preparation (some would argue up to 24 months). Early preparation enables you to optimise operations and financials – for example, by demonstrating a lower working capital need – which can, in turn, support a higher valuation. You may also be able to influence EBITDA positively before year-end by pausing expansion plans or R&D investments, thereby demonstrating sustainable long-term earning capacity.
Clarify IP Ownership and Risks
Ensure that all intellectual property rights (logos, code, trademarks, etc.) are properly owned by the company. Review which IP assets are used in the business and whether there are any uncertainties regarding the company’s claims to those rights. Are you using any assets that might infringe on third-party IP, or do you rely on open-source components? If so, secure proper licences and take any necessary steps to ensure your IP does not inadvertently fall under open-source licensing requirements. Depending on the industry, IP may represent a major part of the company's value for a buyer.
Clarify Share Ownership and Agreements with Partners/Employees
In small to mid-sized companies, it's common for buyers (through their professional advisers) to uncover unclear ownership arrangements or even historical disputes regarding share allocations, promised equity, or improper or missing share certificates. These issues can be serious red flags for a buyer. Even if resolvable during the process, they can weaken the seller’s position in warranty and liability negotiations.
Keep Corporate and Personal Finances Separate
Ensure your bookkeeping and financing structures are in order, including a clear separation between the owner’s personal finances and the company’s. This applies both to small businesses owned by individuals and to mid-sized companies that are part of a larger group with intercompany transactions.
Prepare for Carve-Outs or Spin-Offs
If the transaction involves a carve-out or spin-off of a specific unit or group, identify and address dependencies between the part being sold and the rest of the business group early on. Structuring these dependencies in advance can significantly improve both the quality and valuation of the divestment.
Other Common Mistakes – That Can Be Costly for the Seller
Granting a long exclusivity period to a single buyer via a term sheet, which shifts negotiating power in favour of the buyer.
Failing to secure proper employment and consultancy agreements, including clear IP transfer provisions, which increases legal exposure and weakens your negotiating position.
Using template contracts from the internet for customer and supplier agreements, which are not tailored to your business. This can create unnecessary risk and make the company less attractive to buyers.
Agreeing to an earn-out with unclear or unverifiable calculation criteria, or worse, where the buyer has the ability to influence the outcome – leading to disputes or lost value for the seller.
Accepting absolute warranties, which significantly increases the risk of future claims from the buyer. (Remember: companies are typically sold “as is.”)
Signing a transfer agreement with no or inadequate limitations on liability, giving the buyer the ability to claim significant compensation for extended periods, should post-closing issues arise.
Accepting an overly broad or long non-compete obligation, which prevents the seller from operating within their area of expertise for an unnecessarily long time or in markets that don't actually compete with the sold business. (Note: competition law often restricts the duration and scope of non-competes.)
Summary
Selling your company is a major milestone – one that many only experience once or twice in a lifetime. Done right, and with an attractive business to offer, it can result in an excellent outcome. Done wrong, it can lead to price reductions, liability claims, or drawn-out disputes. My recommendation: always seek qualified legal advice – and do it early.
Author: Kat Strandberg
Stockholm, 2025-05-28