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Parting ways with your business is an inevitable process for most entrepreneurs; be it time to retire, or simply move on to pastures new.
Perhaps you have spent decades building your business from the ground up and are ready to take a step back, or you’re simply looking for a new challenge; whatever the case may be, a successful exit strategy is vital to ensuring you gain the most value from your business.
Selling your business is a complex and often daunting process. In this guide, we’ll cover everything you need to know to help make it as smooth a transition as possible. So let’s get started.
Preparing your business for a sale
The first step to take when selling your business is to assess the appeal your company has to potential buyers. Consider factors like your position in the market, your potential for expansion and growth, the size of your customer base, and your revenue stream.
You’ll need to gather all the relevant details relating to your business that potential buyers may want to review, to help them make an informed decision. This should include:
- Organising your records and paperwork
- Preparing up-to-date accounts
- Getting leases and contracts in order
- Resolving any outstanding disputes with suppliers, employees, or customers
- Liaising with tax, legal, and accounting advisers on potential deal structures
- Fixing or updating any areas of your premises that may be in need of repair
Having information relating to all of the above readily available will help buyers to feel more comfortable and confident when forming a decision.
Getting a valuation
Now it’s time to determine the asking price for your business. This will be based on a combination of factors that go beyond just your physical assets.
Buyers will take into account things like the consistency of your revenue, your projected profits, your staff, liabilities, brand reputation, and future potential – which can make deciding on a figure much more complicated than initially realised.
For limited companies, you’ll need to decide whether to do an asset sale or a share sale. Both methods differ substantially in terms of how the assets of the business are transferred to the buyer.
In an asset sale, the buyer purchases the individual assets of a company such as property, equipment, and inventory, rather than taking ownership of the business itself.
The seller retains ownership of the legal entity of the business, and may remain responsible for any unresolved liabilities or debts.
This method allows the buyer to choose the assets they want to purchase and avoid any complex legalities associated with the business.
In a share sale, the buyer purchases the ownership (shares) of a company inclusive of its assets and liabilities. In other words, the buyer assumes all of the company’s obligations, debts and ownership and the legal entity remains intact, leaving no need to transfer individual assets.
Whether or not you choose an asset or share sale will depend on your circumstances and the preferences of the parties involved.
It’s important to be able to justify your valuation to potential buyers and be ready to negotiate, no matter what price you set for your business.
It’s often a good idea to seek the assistance of a business appraiser for expert guidance, especially if you feel unsure. In a similar way to a house valuation, they can provide you with an educated estimate and detailed summary.
Preparing to negotiate
As we’ve already mentioned, you should prepare to negotiate with your prospective buyers, who will undoubtedly attempt to get your price down or lower the deal terms.
You should account for this inevitability in your valuation, so that you have some wiggle room to work with.
Remember, negotiation works both ways. Try to research your buyer in as much depth as possible, to identify what their goals and priorities look like. This will help you position your unique selling points and highlight the most valuable aspects of your business that will hold the most appeal to the buyer.
Communication will also be key in your negotiation strategy. Follow up enquiries and discussions promptly and put important notes down in writing. You may also want to ask any prospective buyers to sign confidentiality or non-disclosure agreements to protect your privacy.
Finding a buyer
There are now more ways than ever before to advertise the sale of your business to prospective buyers.
You might choose to use the service of a business broker who can help you promote your company through the relevant channels, or you may choose to do this yourself by listing your business on websites, local publications, and/or social media pages.
Or perhaps you already have some industry contacts in mind who you feel may be interested and can approach directly.
Consider all avenues carefully and be sure to read up on the terms and conditions brokers may have in place.
Be ready for extensive due diligence
Any buyer serious about purchasing your business will want to conduct thorough due diligence to ensure they’re making a worthwhile investment.
They’ll want to examine your company with a fine-toothed comb to assess potential risks and opportunities. Any gaps or glitches could quickly put them off a sale, so it’s crucial to be prepared.
Many sellers choose to hire the support of a legal professional or an accountant to take care of this important step on their behalf.
To give you a better understanding, here are some key areas you will need to consider:
- Financial documents – prospective buyers will usually want to assess the financial health of your company by reviewing financial statements, tax returns, and any relevant financial insights you may have from the last three years (if applicable to your start date), so you will need to have these ready and organised.
- Liabilities – be transparent about any financial obligations you may have and resolve any outstanding debts where possible.
- Statutory registers – be sure that your registers are all up to date.
- Legal and regulatory compliance – the buyer will want to ensure that your business is in compliance with any relevant laws and regulations, such as employment laws, environmental regulations, and business licenses. You may be required to demonstrate documentation for this and explain any potential legal or regulatory issues that could affect the buyer.
- Contracts and agreements – make sure your employee, customer, and supplier contracts, lease agreements, and any other relevant agreements are up to date and be prepared to provide copies of any useful paperwork.
- Inventory, properties, and assets – ensure you’re clear on what’s included in the sale, as well as current inventory levels, and provide details on your lease if one exists.
- Intellectual property – give details on protection surrounding any trademarks, patents, or other intellectual property you may own.
- Insurance – ensure your business is covered with adequate insurance right up until the sale has gone through.
Agree on the terms of the sale
Outlining the terms of your business sale helps lay the groundwork for a smooth transaction and ensures that both the seller and buyer are on the same page.
As such a critical aspect of your business sale, it’s important to seek the advice of legal and financial professionals, so that all parties can be confident that the terms of the sale are fair and legally binding.
As an example, some of the key areas you’ll want to discuss and decide upon will include:
The purchase price – the amount that the buyer will pay to you.
Payment terms – how the buyer intends to pay the purchase price. Will it be in one lump sum? Will it be via instalments over a set period of time? Will there be a down payment upfront?
Depending on the payment arrangements, it’s a good idea to have security in place in case the buyer defaults. A solicitor will be able to support you with this.
Assets and liabilities – what’s included in your sale? This might involve details of physical assets such as equipment and inventory, as well as intangible assets like intellectual property and customer lists.
Conditions of the sale – details of any conditions you’ve agreed on that must be met before the sale can be completed, such as obtaining regulatory approvals or securing financing.
Complete a business purchase agreement
Once the key terms of the sale have been negotiated and due diligence has been conducted, it’s time to agree on the business purchase agreement.
A purchase agreement is a legal document outlining the terms and conditions for the sale of the business.
It is a contract between the buyer and the seller that details key aspects of the transaction, such as the purchase price, payment terms, completion date, and any other conditions of the sale.
As a complex legal document, it will most likely be finalised through a solicitor, in the same way as a house sale.
Address your team
If you employ a team, you must tell them why and when you are selling the business. It’s also highly likely that you’ll need to comply with the Transfer of Undertakings (Protection of Employment) Regulations – otherwise known as TUPE.
TUPE is a UK law that protects the employment rights of staff when a business or part of a business is transferred from one owner to another. It essentially means that any employment contracts are automatically transferred over to the new owner and employees maintain their existing terms of employment including pay and benefits.
Alternatively, if the business sale leads to job losses, it is essential to conduct a fair and transparent redundancy consultation process and provide suitable redundancy pay to eligible staff members.
Informing HMRC
As well as informing your staff, you must also notify HMRC of your business sale, to allow them to update their records accordingly and ensure that you are paying the correct taxes. How you do this will depend on the type of business you are selling.
If you are:
Self-employed
You’ll need to contact HMRC and cancel your Class 2 National Insurance contributions. You can do this online via GOV.UK.
A sole trader
You should complete your final assessment by the deadline and include the date at which you stopped trading.
A limited company
If you are selling your entire shareholding, you’ll need to appoint new directors before you can resign. You should let Companies House know about these changes. And, as we’ve already covered, you will need to inform staff about the sale and what they can expect.
A partnership
Again, if you are selling your share, make sure to fill out your final assessment on time.
In the instance you are selling your entire partnership, you will need to complete a personal self-assessment. The nominated partner will also need to fill out a partnership tax return. Make sure to specify the date you stopped trading.
In all cases, you’ll need to ensure you have paid any outstanding tax or National Insurance.
Taking care of tax
If your business sale involves a profit, you will be liable for Capital Gains Tax (CGT) on anything over your tax-free allowance.
However, the good news is that there are some tax reliefs available that can help reduce this expense, such as Business Asset Disposal Relief – which allows you to pay a lower rate of 10% in CGT, provided you are a sole trader or business partner or have owned the business for more than two years.
Wrapping up
So there you have it, a complete guide to selling your business. Whatever your reasons for moving on, we hope your transition and next chapter is a successful one.
Although it’s sensible to be fully aware of the selling process and what exactly it involves, it is a highly complex procedure, so we strongly recommend seeking the advice and assistance of legal professionals and accountants to support you with your business sale and ensure that everything is completed accurately.
We hope you’ve found this post useful. If you have any questions, please leave a comment below and we’ll come back to you.
