M&A Deal Essentials: Preparing a Company for Sale: Internal Clean-Up Before M&A Closing

When business owners think about selling a company, they usually focus on the visible parts of the transaction. The purchase price is negotiated, the SPA is signed, and the parties work towards closing. 

What often receives less attention is the internal clean-up process of problematic historic agreements identified during the due diligence process, frequently before signing and typically requiring resolution before closing. This clean-up process often takes place behind the scenes before closing, although certain matters may continue as post-closing obligations. 

In many transactions, years of historic arrangements need to be reviewed, unwound, or formally documented before ownership can change hands. While this may initially look like administrative housekeeping, it can quickly become a critical workstream that affects timing, documentation, and even deal certainty. 

Legacy Agreements: Reviewing Historic Arrangements Before a Company Sale 

Most businesses accumulate internal arrangements over time that work perfectly well under the existing ownership structure. 

Common examples include: 

• shareholder loans; 

• management arrangements; 

• related-party agreements; 

• intra-group service contracts; 

• founder-linked consulting arrangements; 

• historic funding arrangements. 

The fact that these arrangements have existed for years does not make them suitable for the next owner. One of the buyer’s key objectives is to acquire a business that can operate independently after closing. That often requires a review of which historic relationships should continue and which should end. 

Shareholder Loans: Repayment, Waiver and Settlement Before Closing 

Shareholder loans are often among the first issues addressed during the clean-up process. 

A loan between a company and its shareholders may have supported growth for years, but a buyer will usually want clarity on its treatment before closing. 

Typical questions include: 

• Will the loan be repaid before completion? 

• Will it be waived? 

• Is it reflected in the purchase price? 

• Who remains entitled to repayment after closing? 

These issues may seem straightforward, but they frequently require additional agreements, payment mechanics, and closing documentation. As a result, what appears to be a simple balance-sheet item can become a substantial transaction workstream. 

Related Party Transactions: Separating the Target Business from Affiliates 

Related party transactions are a frequent source of concern in M&A transactions and due diligence reviews. While such arrangements are often established for legitimate business reasons, they can create significant risks where the interests of shareholders, management, and the company itself are not properly aligned. 

Particular scrutiny is required where transactions appear to favor individuals or affiliated entities at the expense of the target business, resulting in non-arm’s-length terms, excessive dependency, or an inaccurate picture of the company’s true profitability. 

Common examples include: 

• service agreements with shareholders or affiliated entities on above-market terms: 

• intellectual property licensed from founders or related companies, creating operational dependency; 

• management or consulting arrangements that lack commercial justification 

• shared employees, resources, or infrastructure without clear cost allocation; 

• intercompany contracts involving preferential pricing, loans, guarantees, or other financial support. 

Business Handover: Delivering a Stand-Alone Company at Closing 

At its core, the clean-up process has a clear objective. Buyers generally seek to ensure that the business can operate on a stand-alone basis following closing, whether immediately or after agreed transitional arrangements. 

That means ensuring: 

• funding arrangements are clear; 

• historic obligations are understood; 

• key contracts are appropriately documented; 

• ownership and entitlement questions have been resolved. 

In owner-managed businesses, certain arrangements may exist informally and operate successfully for years without written documentation. During a transaction, buyers commonly require such arrangements to be formally documented, clarified, or terminated to reduce uncertainty and future disputes. 

For business owners, the key takeaway is simple: Selling a company is not only about transferring ownership. It is also about making sure the business being handed over is clean, workable, and ready to operateindependently from day one. And in many transactions, that hidden clean-up work is what helps turn a signed deal into a successful handover.