Legal Readiness Isn’t Optional: What Business Owners Overlook When Preparing for a Sale

An interview with Stuti Murarka, Transactional Business Attorney at Cheng Cohen LLC

Too often, founders gearing up to sell their business focus entirely on metrics like revenue growth, market share, and customer retention while overlooking the legal infrastructure holding it all together. But when due diligence starts, oversights in contracts, compliance, or entity structure can derail a deal or slash its value.

Stuti Murarka, a seasoned transactional attorney at Cheng Cohen LLC with a strong focus on franchise law, mergers and acquisitions, and corporate law,  knows exactly where these pitfalls lie. With more than a decade of legal experience across India and the United States, and a practice focused on franchise law, M&A, and corporate structuring, she brings both a strategic and cross-border lens to helping companies prepare for high-stakes transactions.

In this interview, Stuti shares practical insights on what makes or breaks deal readiness  from managing legal red flags to balancing mental and legal preparedness, to navigating earn-outs and non-competes. Whether you’re a founder building toward an exit or a company preparing for acquisition, her perspective offers a timely reminder: legal housekeeping is just as important as market traction when it comes to unlocking a clean, profitable exit.

What’s the single most important legal issue business owners tend to overlook when preparing for a sale?

Many business owners, especially founders, are laser-focused on boosting sales, growing valuation, and making the business more scalable. That makes sense for them. But most businesses run on contracts, and too often business owners overlook a crucial piece of the puzzle, which is keeping their legal and compliance records in order. For example, in my practice as a franchise lawyer, I’ve seen start-up franchisors that don’t maintain good records of signed franchise disclosure receipts — a small detail, but one that’s essential to prove compliance with federal and state franchise disclosure requirements. I have also come across cases where franchisors are missing signatures on or have incomplete copies of key agreements with franchisees, vendors, or other third parties. This failure not only places the business owner at risk of not being able to enforce critical agreements, but it also raises huge red flags if and when the business owner seeks to sell its business. The irony is that all that hard work to drive business valuation can be undercut by careless legal gaps. Poor record-keeping or compliance oversights can lower the deal value or even stall the sale entirely.

How early should a business owner involve a transactional attorney in the exit planning process, and why?

Ideally, as early as possible, and most certainly long before they commence negotiations or even serious discussions with a potential buyer of the business. I think of a transactional attorney like a good general physician: the earlier you build a relationship, the more they can help you stay healthy and avoid problems down the line. Waiting until you’re ready to sell is like seeing a doctor when you’re already sick — by then, the fix may be harder, more expensive, or even impossible. Even during the early stages of business conceptualization legal decisions can have a huge impact on its future. From choosing the right business structure to protecting your intellectual property, early legal advice lays the foundation for a clean and valuable exit later on.

When it comes to exit planning specifically, a transactional attorney should be looped in at least 6 to 9 months before a potential sale. That gives sellers time to clean up contracts, address any legal exposure, optimize corporate structure, and ensure that all their records and compliance requirements are in order.

What are the top legal red flags that can derail a potential deal—or significantly reduce the purchase price?

First, as I mentioned earlier, gaps in legal documentation are a big one — especially if they come to light during due diligence and weren’t disclosed upfront. Missing contracts, unclear IP ownership, or outdated compliance records can all raise red flags for a buyer. Second, unresolved legal disputes, no matter how small, can scare off buyers or force them to hold back part of the purchase price. Whether it’s a pending lawsuit, request for documents or investigation by any government agency, or a dispute with a key employee or franchisee, buyers don’t want to inherit someone else’s problems. Third, ownership or equity issues. If your cap table is messy, or there are unrecorded promises of equity or unclear rights among partners, it creates confusion and potential liability — all of which can delay the deal or reduce the offer. Bottom line is that transparency and clean legal housekeeping go a long way toward keeping the deal on track and protecting your valuation.

How can business owners structure their contracts, IP, and compliance practices in advance to avoid due diligence surprises?

Honestly, there’s no one-size-fits-all answer. Every business has its own unique legal needs, and those needs evolve over time. For example, while it’s not advisable, someone can start a business with all their assets in one entity.  That may work in the beginning, but as the company grows, it often makes sense to separate assets into different entities. For example, one for IP, another for operations, another for human resources, etc. When that happens, it becomes crucial to have clear intercompany agreements in place. Without them, buyers may see risk and uncertainty, which can impact valuation or delay the deal. The key is to be proactive. That way, when due diligence starts, sellers are not scrambling. Also, many start-up businesses are too eager to sign what’s put in front of them. Ideally, contracts are signed, put in a desk drawer, and never see the light of day – the parties develop a relationship that works. The problem occurs when the relationship doesn’t work, and the contract becomes critical. If the business owner has signed a contract that provides it with little to no protections in the event of the other party’s non-performance, it might find itself with little recourse.

What’s the difference between being “mentally ready” and “legally ready” to sell, and how do the two intersect?

Being mentally ready is all about mindset. Some founders know from day one that they’re building to sell, and they’re entrepreneurs at heart, and they thrive on starting, scaling, and exiting. But being legally ready is something else entirely. It means your house is in order: contracts are clean, compliance is up to date, IP is properly protected, and there are no surprises waiting in due diligence. The problem is, if those two don’t align, and if you’re mentally ready but legally unprepared, then you risk leaving serious money on the table. Deals get delayed, valuations drop, or buyers walk away. The best outcomes happen when both the mindset and the legal groundwork are in sync.

Are there specific deal terms or clauses in purchase agreements that sellers should approach with caution?

From a seller’s perspective, I always watch out for terms that survive well beyond the closing of the deal and can have real consequences for the seller. First, sellers need to be crystal clear on what they’re promising in the reps and warranties  and for how long those promises stick. Indemnification is another big one because it outlines what the seller might be on the hook for after the deal closes, including how much and for how long. And then there’s the non-compete because it needs to be fair and reasonable, or it can limit your ability to pursue future opportunities. Outside of these, deferred payments or earn-outs are also worth close attention, but those are usually tied to financial performance. The clauses above, though, can linger and affect a seller long after the ink is dry.

What role does entity structure (LLC, S-Corp, C-Corp, etc.) play in the sale process, and can it impact tax outcomes or buyer interest?

The right entity structure really depends on the business’s goals — there’s no one-size-fits-all answer.  For example, LLCs are generally easier and cheaper to form and maintain. They come with fewer formalities, which makes them attractive for smaller businesses or solo founders. But if you’re planning to raise venture capital or eventually go public, a corporation  is usually the preferred route especially since most investors are more familiar and comfortable with that structure. From a tax perspective, the structure matters a lot because certain types of entities offer pass-through taxation, which can be more favorable in certain sale scenarios. On the other hand, certain entity structure may trigger double taxation — once at the corporate level and again at the shareholder level. But then again, there are ways to structure a deal to reduce the amount of tax that the sellers pay. Bottom line is that your entity structure can influence how attractive your business looks to buyers and how much you walk away with after taxes. It’s always a smart move to talk to both legal and tax advisors early on to make sure you’re set up in a way that supports your long-term exit strategy.

For founders who plan to stay on after acquisition, what legal protections or considerations should they include in their agreements?

First, make sure your employment agreement clearly outlines your title, responsibilities, and compensation, including salary, bonuses, equity, and any performance-based earn-outs. Get everything in writing and ensure the terms are realistic. Keep in mind, you’re no longer the boss; regardless of your title, decision-making power will likely shift. Second, consider the “what if” scenarios. Know how long you’re expected to stay, the conditions under which you could be let go, and what severance or protections you have if you’re terminated without cause. Lastly, watch the non-compete and non-solicit clauses. They should be reasonable in scope, time, and geography so you’re not unfairly restricted from working in your industry down the road.

The post Legal Readiness Isn’t Optional: What Business Owners Overlook When Preparing for a Sale appeared first on SiteProNews.

Source: https://www.sitepronews.com/2025/07/28/legal-readiness-isnt-optional-what-business-owners-overlook-when-preparing-for-a-sale/