Selling Your Business to an Investor? What Is Wrong With Your Current Structure

Why This Matters More Than It Seems

Most business owners believe deals fall apart over price or market conditions. In practice, transactions collapse during due diligence — not because the underlying business is flawed, but because the structure is not fit for acquisition.

The investor or buyer conducts due diligence and finds: assets are held by the wrong entity, intellectual property belongs to an individual rather than a legal entity, key contracts are non-assignable, the beneficial ownership chain is opaque. The deal either fails to close or closes at a price materially below the seller's expectations.

The problem is not intent. The problem is that the structure was built for operational efficiency, not for sale. These are different objectives, requiring different solutions. That gap represents precisely the value the owner forgoes at the point of sale.

Executive Summary

Transaction readiness is not created in the week before closing. It is a condition of the corporate architecture that either exists or does not. Investors pay a premium for a clean structure and apply a discount to everything that creates uncertainty: tax risks, disputes over asset ownership, opaque beneficial ownership, missing approvals.

Most structural problems in a sale reduce to three categories: asset issues (what exactly is for sale and who legally owns it), liability issues (what passes to the buyer together with the company), and control issues (who actually has the legal authority to complete the transaction).

Three Diagnostic Questions

What are you selling: assets, shares, or a business — and is the structure documented accordingly?

Who owns it: do all key assets, contracts, and intellectual property belong to the entity being sold?

Who has the right to sell: have all necessary corporate approvals been obtained and are there any outstanding pre-emption rights held by third parties?

A structure that has not been prepared for sale is worth less. Always. The only question is how much less — and whether the situation can be remedied before the investor identifies the problem during due diligence.

1. Assets: What Is Being Sold and Who Owns It

The first and most common problem: the key assets of the business do not legally belong to the entity being sold. This arises not from bad faith but from the way the business grew: intellectual property is registered in the founder's personal name, operating assets are held by the operating company, while what is being sold is the holding company, which legally owns only shares in subsidiaries.

Intellectual Property

IP is the most frequent source of problems. The buyer is paying for the technology, the brand, or the customer base. If the trademark is registered in an individual's name, the patent belongs to an employee, and the software code was developed by contractors without an assignment agreement, the buyer effectively acquires a company without its core asset.

The standard outcome: a price renegotiation, or a requirement to transfer the asset to the correct legal entity before closing — which takes months.

Client Contracts and Licences

Many agreements contain restrictions on assignment without counterparty consent. In a share sale, the contract is not technically assigned, but a change of control may be treated as an effective assignment under the contract terms or applicable law. This is particularly critical in regulated businesses: a licence granted to the company may not survive a change of beneficial owner.

Real Estate and Equipment

Real estate and equipment frequently belong to different group entities, affiliated individuals, or are used under informal arrangements. A buyer conducting due diligence will identify this and either require the assets to be properly transferred before closing or hold back a sum in escrow pending resolution.

In technology company sales, buyers increasingly request a complete intellectual property register confirming the chain of title for every asset, including an open-source software licence audit and an assessment of data used to train AI models.

Self-assessment — Assets:
– Do all key business assets (trademarks, patents, software code, customer relationships, licences) legally belong to the entity being sold?
– Are IP assignment agreements in place with every developer, designer, and contractor?
– Do key client contracts contain change of control provisions? Have counterparty consents been obtained?
– If the business is licensed, will the licence survive a change of beneficial owner?

If even one key asset does not legally belong to the entity being sold, the transaction will either fail to close or close at a price materially below expectations.

2. Liabilities: What Passes to the Buyer

The second category: liabilities the buyer is unaware of or that are not reflected in the documents. Due diligence systematically uncovers: tax arrears and retrospective assessment risk for prior periods, undisclosed obligations under related-party loans, employment disputes and unresolved employee option programmes, and guarantees issued in favour of third parties absent from the balance sheet.

Tax Risks

Tax risks are the most sensitive category. A buyer acquiring shares takes on the company's entire tax history. If aggressive optimisation schemes were used in the past, intercompany loans were structured without the arm's length principle, or royalties were paid without adequate economic substance, the tax authority may raise claims against the newly acquired company.

The buyer's standard protection: a tax indemnity in the sale and purchase agreement, transferring liability for prior periods to the seller, and a sum held in escrow for the standard tax limitation period in the relevant jurisdiction.

Intercompany Loans and Related-Party Transactions

Intercompany loans and non-arm's length transactions with related parties create a dual problem: they either represent an undisclosed liability that must be repaid before closing, or they point to value extraction from the company, which depresses the valuation. The buyer will require full disclosure and repayment of the loans — or their restructuring — before closing.

Employee Option Programmes

Option programmes that lack legal documentation create uncertainty in the capital structure. If employees believe they are entitled to a share of the proceeds and the documents do not support that belief, litigation risk arises that may prevent closing.

Self-assessment — Liabilities:
– Has an independent tax audit been conducted for the past three years?
– Are all intercompany loans and related-party transactions documented at arm's length with adequate supporting documentation?
– Do any employees or consultants hold unresolved equity entitlements?
– Have any sureties or guarantees been issued in favour of third parties not reflected on the balance sheet?

Undisclosed liabilities do not automatically block a transaction, but they invariably translate into a price reduction or funds held in escrow.

3. Control: Who Has the Authority to Complete the Transaction

The third category covers corporate governance and authority. A transaction may be legally impossible to complete without a series of approvals the seller was unaware of or regarded as a formality.

Pre-emption Rights

Pre-emption rights are the most common obstacle. If the shareholders' agreement or articles provide for pre-emption rights in favour of existing shareholders, the seller must offer shares to them on the same terms before completing a sale to a third party. Disregarding this requirement renders the transaction voidable.

In practice, this means either obtaining a written waiver or conducting a full offer procedure — which takes between two and eight weeks depending on the jurisdiction.

Change of Control Provisions

Change of control provisions in loan agreements, licence agreements, and leases may require lender or counterparty consent to a change of shareholder. A breach entitles the lender to demand early termination or repayment. Professional buyers and their legal advisers check this as a priority and require confirmation that all necessary consents have been obtained before closing.

Board Resolutions and Director Authority

Depending on the jurisdiction and the articles, a sale may require approval by the board of directors, a general meeting of shareholders, or a qualified majority. If the required approval has not been properly obtained, the transaction may be declared void.

Beneficial Ownership Chain and Sanctions Compliance

Buyers from EU and US jurisdictions are required to verify that none of the seller's ultimate beneficial owners is a sanctioned person. An opaque holding structure, trusts without a disclosed beneficiary, or nominee shareholders without documentation will slow the transaction. For buyers from regulated jurisdictions or listed companies with compliance obligations, such deficiencies may make the transaction impossible altogether.

Self-assessment — Control:
– Does the shareholders' agreement or articles provide for pre-emption rights, and have all necessary waivers been obtained?
– Do key agreements contain change of control provisions requiring counterparty consent?
– Have all necessary corporate approvals been obtained to complete the transaction?
– Has the full beneficial ownership chain been disclosed, and confirmed that no sanctioned persons appear in the chain?

The absence of necessary approvals or an opaque beneficial ownership chain is not a matter for negotiation. It is a legal barrier that blocks closing.

When to Begin Pre-Sale Preparation

Pre-sale preparation does not begin in the week before the sale and purchase agreement is signed. It begins one to three years before going to market.

First, an asset audit is conducted: what belongs to the entity being sold and what needs to be transferred. Then structural problems are resolved: tax risks, undocumented rights, intercompany loans, and non-arm's length transactions. After that, the corporate documentation is put in order: shareholders' agreements are reviewed and updated, the necessary board and shareholder resolutions are passed, and a register of required approvals is compiled. Each step follows from the previous one.

Companies that have completed pre-sale preparation close transactions faster, at a smaller discount, and with less capital held in escrow. Those who approach a buyer with an unprepared structure either lose the deal entirely or surrender a significant portion of value in the process of resolving problems identified during due diligence.

If you are planning a sale within the next one to three years, an initial consultation will identify what needs to be addressed before going to market.