Avoiding Common Legal Pitfalls in Business Exits

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Exiting a business is one of the most significant financial and emotional events in an owner’s life. Despite the high stakes, many business exits are rushed, reactive, or poorly planned, leading to costly legal missteps that could have been avoided with proper planning and legal guidance.

According to glassmagazine.com, for example, improperly drafted buy-sell agreements can result in millions in unintended tax liabilities, an issue uncovered in many post succession audits.

Here are some of the most common legal pitfalls in business exits and how to avoid them:

Failing to Formalize Key Agreements Early:

Too often, handshake deals or outdated operating agreements resurface as problems during due diligence. Agreements with partners, vendors, or key employees that aren’t clearly written or signed can derail a deal or create post-sale exposure.

To Avoid This Problem: Ensure all ownership, employment, customer, and vendor agreements are current, signed, and legally binding. Review partnership, buy-sell, and shareholder agreements with a legal advisor at least a year before initiating an exit.

Overlooking Employment and Compensation Issues:

Unresolved HR issues, such as undocumented bonus plans, misclassified workers, or unclear intellectual property (IP) ownership can significantly reduce buyer confidence and valuation.

To Avoid This Problem: Conduct an internal HR audit. Formalize compensation policies, ensure that IP created by employees or contractors is owned by the business, and resolve any known employee grievances before entering into negotiations with a potential buyer.

Not Protecting Intellectual Property (IP:)

Intellectual property, like trademarks, patents, copyrights, and trade secrets, is often one of a business’ most valuable assets. If not properly registered or protected, IP may be excluded from valuation or become the source of post-sale disputes.

To Avoid This Problem: Register your IP with appropriate agencies, ensure all IP is owned by the business (not individuals,) and use confidentiality and invention assignment agreements with staff and contractors.

Ignoring Regulatory Compliance and Licenses:

Many industries — including, healthcare, construction, and financial services — have licenses, certifications, or permits that may not be transferred automatically to a buyer. Noncompliance or a lapse in licensure can delay or derail a sale.

To Avoid This Problem: Review all licenses and permits early. Collaborate with legal counsel to ensure they are current, transferable, and fully documented. If needed, begin the process to update or reapply well in advance of closing.

Poor Tax Structuring:

The wrong exit structure can result in unnecessary tax liabilities, such as double taxation or capital gains traps. Missteps here can cost owners millions in avoidable taxes.

To Avoid This Problem: Work with a tax advisor and legal counsel early to structure the deal in a tax-efficient manner. This may include choosing between an asset vs. stock sale, forming a trust, or utilizing estate planning tools.

Undisclosed Liabilities:

Buyers will scrutinize litigation history, environmental issues, pending claims, and debt. Failing to disclose, or worse, hiding liabilities can break a deal or lead to indemnification lawsuits after the sale.

To Avoid This Problem: Conduct a pre-sale legal audit to identify and clean up known liabilities. Be transparent in disclosure schedules and prepare thorough documentation for due diligence.

Weak Non-Compete and Non-Solicitation Agreements:

If the seller plans to stay in the same industry or start a new venture, buyers will want protection. Weak or missing non-compete agreements can scare off buyers or reduce the sale price.

To Avoid This Problem: Negotiate reasonable, enforceable non-compete and non-solicitation terms, especially for key owners and executives. Make sure they comply with state-specific laws: especially in states like California or Texas, where rules vary.

Lack of Legal Representation:

Many business owners attempt to manage the exit process with only a broker or accountant. While those advisors are crucial, a legal misstep during negotiation or drafting of the purchase agreement can have lasting consequences.

To Avoid This Problem: Engage with a business attorney with experience in your exit pathway (for example, a sale to a private equity group, ESOP, a strategic buyer, or succession to a management team or family member) and don’t hesitate to bring in other advisors with the expertise needed to guide your best exit. Their insights during negotiation, due diligence, and contract drafting can protect your interests and maximize value.

Final Thoughts:

A business exit is not a cut and dry transaction, but rather a transition that involves strategic foresight, planning, and legal precision. Avoiding these legal pitfalls requires starting early, assembling the right team, and treating the exit as your most important business decision. The best exits are thoughtful, legally clean, tax-efficient, emotionally satisfying, and increase the business’ exit and owners’ value.

To Mitigate The Risks Associated With Poor Business Exit Legal Planning:

Draft and update formal succession plans early, ideally 3–5 years before exit.
Create and fund buy-sell agreements with clear valuation methods and tax-aware structuring.
Implement employment/inventor assignment agreements, non-competes, and confidentiality clauses.
Document expected roles post-exit, including consulting or earn-out agreements.
Prepare successors via education, mentorship, and trial leadership roles.
Proactively disclose and audit liabilities, including contingent litigation or licensing gaps.

Did you like the content in this article ? For more information about business exit and succession planning, the author has posted his entire series of business exit and succession planning articles on the media page of his website at www.greaterprairiebusinessconsulting.com.

About Greater Prairie Business Consulting, Inc.:

Greater Prairie Business Consulting, Inc. is an award-winning, national consulting practice serving entrepreneurs, small to mid-sized privately held and family-owned businesses and middle-market companies of any type with revenues between $1 million and $250 million. The firm helps small, mid-sized and middle market companies maximize their performance and exit.

Greater Prairie Business Consulting, Inc. can be reached by calling 1-800-828-7585 or emailing info@gpbusinesssolutions.com.

About the Author:

James J. Talerico, Jr. is an award-winning author, blogger, speaker, and nationally recognized small to mid-sized (SMB) business expert.

With more than thirty- (30) years of diversified business experience, Jim has a solid track record and an A+ BBB rating helping thousands of business owners across the US and in Canada tackle tough business problems to improve the performance of their organizations.

His client success stories have been highlighted in the Wall St. Journal, Dallas Business Journal, Chicago Daily Herald, and on MSNBC’s Your Business. He was named “Texas Business Consulting CEO of the Year,” by CEO Today Magazine, identified as a “Top 10 Management Consulting Entrepreneur to Watch” by Entrepreneur Magazine, was listed among the “10 Most Visionary Companies to Watch” by Inc. Magazine, and has also been ranked among the “Top Small Business Consultants” followed on Twitter.

For more than half a decade, Jim was a regular guest on “The Price of Business,” a nationally syndicated radio program on Bloomberg Talk Radio and has also appeared as a subject matter expert on many FOX Radio interviews. He is a regular contributor to several blog sites and has frequently been quoted in publications like the New York Times, Dallas Morning News, Philadelphia Inquirer, The Entrepreneur’s Review, The International Exit Planning Association’s blog site, and on INC.com, in addition to numerous, other industry publications, radio broadcasts, business books, and Internet media.

Jim received a Gold “Stevie Award” for “Thought Leader of the Year,” a Gold “Stevie Award” for “Media Hero of the Year During Covid” and a Bronze “Stevie Award” for “Best Entrepreneur” in the Category of “Business and Professional Services” at the American Business Awards ® in New York City. The competition received more than 3,700 nominations and is the premier accolade for business excellence in the US honoring organizations of all sizes and industries. Jim also received an “Outstanding Leadership Award” at the Money 2.0 Conference for his contributions to the financial services industry.

Jim is the author of “8 Steps to Becoming an ETHICS FOCUSED ORGANIZATION,™” a small business certification program that utilizes a unique eight – (8) step approach for strengthening ethics in any organization. The certification program won the Better Business Bureau’s “Torch Award for Ethics” for the North – Central Texas Region, the International Better Business Bureau’s “ Torch Award for Ethics,” and a Gold “Stevie Award” for “Ethics in Sales” at the International Sales & Customer Service Stevie Awards®. Participants who complete this certification program are eligible to receive eight – (8) continuing education units from the University of Texas’ Division of Enterprise Development.

Jim received his Certified Business Exit Consultant (CBEC)® designation from The International Exit Planning Association (IEPA) to help entrepreneurs, small business owners, family businesses, and middle market companies maximize their business exit, and he received his certification in succession planning from the ASPE.

Jim is also a Certified Management Consultant (CMC)® and an active member of the Institute of Management Consultants. The Certified Management Consultant® mark is awarded by the Institute of Management Consultants USA (IMC USA) and represents evidence of the highest standards of consulting, a commitment to continuous development, and an adherence to the ethical canons of the profession. Less than 1% of all consultants in the world are Certified Management Consultants (CMC.)®