Selling a business
The idea for a business often starts when an entrepreneur decides to turn their personal profession and passion into a viable idea from which they feel they could generate a profit.
Rarely do business ideas come off the back of things that we don’t enjoy doing, nor do they usually take inspiration from a job that we disliked. We now live in an age where we are no longer satisfied with simply earning money – our job role has to have meaning and must play a positive role and add value to our lives.
Being part of creating and building a successful business can be hugely gratifying and a great source of happiness and fulfillment – in some ways it can form part of our identity. It is this, in combination with the years of hard graft and tremendous personal investment, that is what makes the decision to sell a business and move on an extremely difficult one to reach.
Why am I selling my business?
Before you commit to selling your business it is important to establish your reasons for its sale. It may be that you wish to relinquish all of the responsibilities that come with directorship, or it may be a decision based purely upon finances.
Whatever the reason it is important to ask yourself ‘Why am I selling’ so that you can obtain a clear picture of your objectives and whether you will achieve them through the sale of your business.
Make yourself aware of all of the alternatives that are available to you and consider them as viable options. You may find that depending on your reasons for sale there could be a more appropriate option. For example - selling a minority equity stake could unlock some capital for shareholders, or a retiring shareholder may wish to sell their shares back to the company to release capital without the business changing hands.
Once you have evaluated all of the options, you may of course find that selling up is still the best and most appropriate course of action. There is much to consider when selling a business - from marketing the company through to your responsibilities to your current employees. Though each company will adopt its own unique sales procedure, generally speaking the process usually involves the following key stages:
Before you even begin to think about marketing your business and negotiating a sale, there is much groundwork to be done. According to some research, in general vendors should allow approximately six months from commencing the sale process to achieving legal completion. Updating accounts and paperwork, notifying HMRC and performing a final assessment are just a few of the provisions that need to be made prior to marketing.
When selling the business, your business will become the product so you will need to market it as such. Strong marketing will help you to attract the right buyer for your business, and more importantly, the right price.
3. Deal management and sale completion
Negotiating the right deal and terms, fulfilling you obligations as an employer to your employees and paying tax on asset sales and transfers all need to be considered during this final stage.
This guide is designed to cover the key aspects of selling your business. Please note, this is intended for guidance use only and does not cover all situations or provide a full statement of the law. We recommend that before selling your business you appoint a team of advisors (for example an accountant, solicitor and financial advisor), who will assist you in the management of the project. Please read on to financial advisors to find out more.
Business sale – the options
Selling a business is not as simple as putting it on the market and showing around potential buyers like you would do in the case of property. The most popular way to sell a business is to sell on to another company that typically work within the same or a similar field. However, there are other options you may wish to consider, which include the following:
Full or partial sale
You may decide that you want to entirely hand over the reigns of the business and sell it in its entirety, or you may opt to retain a small stake. The latter option may appeal to buyers who would like you to keep a small stake in the company so that you remain involved on some level. Your continuing involvement will reassure the new owner that the business will continue to thrive.
Instead of selling the business itself you may want to consider selling on some assets to release capital. This could include equipment, or your customer list for example.
Another option is to sell the majority of your assets to a buyer who doesn’t wish to take on certain obligations such as employees. This way the seller will be left with the remaining assets and liabilities which have not been included as part of the sale.
You may decide that you wish to receive payment for business sale in full upon completion of the deal. However, other options include phased payments or an earn-out deal. A phased payment scheme is payments made in installments. An option which many buyers prefer but which put a seller at risk if their buyer is unable to make future payments.
Similarly to phased payments, an earn-out again involves payments being made in a series of installments but this time part of the sales price is determined by the performance of the business over an agreed post-sale trading period.
It is a contractual commitment by a purchaser to pay further value for your company if you meet the performance targets that have been agreed upon. From a buyers perspective the purpose of an earn-out is to provide an incentive to the seller to ensure that the acquisition is a success. Earn-outs also safeguard buyers from over paying for ‘potential’ that is yet to be realised.
From the sellers point of view, an earn-out can be a good way of receiving compensation for the anticipated future value of the company and it also helps to bridge the valuation gap between their price expectation and the price the purchaser is offering based on the financial performance of the company.
Preparing to sell your business
No successful business started without plenty of thought having gone into the product, the target customer, market demographics and a good solid business plan and in that respect selling a business is also very similar. Careful planning and adequate preparation is key to a hitch free sale – so before putting your business on the market the following steps should be undertaken:
1. Writing a business plan/exit strategy
When starting a business one of the most important first steps is writing a business plan that explains your goals and how you plan to achieve them, a process that is also fundamental to the sale of a business.
Ideally, sit down with your team of advisors – solicitor, accountant, financial advisor etc. and write out a formal plan of your objectives, your strategy for achieving them and a realistic timescale in which the goals should be completed.
Your plan, or ‘exit strategy’ as it is sometimes known, should include everything you need to do such as updating paperwork, tax requirements, informing the relevant organisations and sorting out rental or lease agreements before commencing any further.
2. Updating paperwork and accounts
It is essential that business owners ensure that their paperwork, official records and accounts are up to date before putting their business on the market. Gathering together this information is not just important from a legal perspective, but also from the perspective of a buyer.
A buyer will want to see any relevant outstanding loans or leases, tax returns and profit and loss statements among other things. The buyer’s solicitors and accountants will carry out diligence checks to ensure this information is correct and also to help the potential buyer to make informed decisions, and to negotiate terms of sale.
Presenting a buyer with sound accounts will give you the opportunity to demonstrate the steady and sustainable profitability of your business and will also help to reassure potential buyers that the statutory tax affairs and additional obligations of the company are in order – both factors which could improve the likelihood of sale and the total price achieved.
At this stage you should also inform both existing customers and suppliers that they will need to raise any outstanding payments, credits and liabilities, and that you will be able to account for these once you have finalised your account and tax matters.
3. Stopping self-employment
If you are registered as self-employed there are a variety of factors that you must take into consideration. Firstly you must notify HM Revenue and Customs that you have ceased trading before accomplishing the following:
- Complete your Income Tax assessment – You will still need to complete this for the tax year in which your employment ended. Please note, this works slightly differently if you are leaving a partnership.
- Report capital gains – If you are selling on business assets such as buildings, equipment or business reputation (‘goodwill’) then you may be required to pay Capital Gains Tax on any profits that you make. If you are leaving a partnership and are selling assets that are personally yours or those owned by the partnership, you may be asked to provide details of your share of the gain or loss.
- Cease National Insurance Contributions – Your National Insurance contributions will be affected if you stop being self-employed so you will need to notify HMRC to let them know.
4. Selling a limited company
Selling a limited company or a limited liability partnership (LLP) more often than not results in a change of the company directors and the company secretary. If this is the case you will need to contact Companies House to inform them of the changes.
Other procedures you may need to carry out include the following:
- Tax returns – If your company is liable to pay Corporation Tax then you must still file tax returns and pay Corporation Tax up until the handover day. Any capital gains made when you sell any assets should be accounted for in the Company Tax Return.
- Report capital gains – If you gain any profit from the sale of company assets then you may be required to pay Capital Gains Tax.
5. Employer responsibilities
When you sell your business, all of your employees will automatically transfer over to the new employer. Business transfer legislation states that it is your responsibility as the current employer to inform and consult your employees about the impending transfer in good time.
Maximise your business value
Business valuation is a problematic area because obviously the value that both yourself and your financial advisors come to is likely to be subjective in some way. It is not uncommon for business owners to place an unrealistically high value upon their own business, but you should keep in mind that in doing this you are limiting your potential buyers.
Ultimately, your business is only worth what the highest bidder is prepared to pay for it, so to ensure that this is the highest possible amount, take steps to ensure your business is the very best it can be before you finalise the valuation.
For more information about valuing your business, please visit our separate fact-sheet on business valuation.
Making your business as attractive as possible by streamlining operations and tying up loose ends may mean that your buyer is prepared to pay more.
Consider outlining some of the following in your business plan/exit strategy:
- Ensure that any equipment you have that you will be passing on is well maintained and that it meets any existing guidelines.
- Ensure that all current contracts are in order.
- Resolve unsettled disputes or any outstanding legal proceedings.
- Show that you have a strong management team in position. If a buyer believes your business is too reliant upon your personal management then it may mean they choose not to proceed. Avoid this by putting a sound management structure into place that can continue after your departure.
- Ensure that the company complies with all current legislation.
- Demonstrate that your customer base is expanding. For example, if you have some informal deals in place with customers, finalise these. A potential buyer will be interested in how full the company order book is and in the company’s relationship with its customers.
- Ensure that all current procedures comply with health and safety regulations.
- Ensure that you have clear ownership of any intellectual property, including brand names and designs.
Marketing your business
A sales memorandum is a document prepared for the purpose of generating interest in your company. It is your opportunity to highlight what is great about your business and also to outline what will be included in the sale for potential buyers. Ideally, a good memorandum will prompt a meeting between the seller and a serious buyer.
In your memorandum you should include any significant financial information such as profits, losses, cashflow, assets and debts for both the current financial year and the previous financial year at the very least. Sales memorandums also commonly include the following information:
- employee information – number of employees, job roles and the premises on which they are located
- favoured sale structure
- special features e.g. patents
- company history
- company ethos
- business achievements and awards
- customer profile
- customer testimonials.
A memorandum is not the place for any confidential information such as customer details or pricing structure. This information can be shared at a later date with potential buyers that you feel are genuinely interested.
Identify potential buyers
In an ideal world you could sit back and wait for the perfect buyer to seek out your business and offer to pay a fair price for it. In reality however, you should create a shortlist of possible buyers to approach before taking your business to them.
Start by thinking about other businesses in your sector that may wish to expand. For example a key competitor might be interested in your customer list if they are looking to cross sell their products. You may also have a product that they do not – therefore filling a gap in their range.
Other possible buyers could include customers and your existing management team. If you do opt to explore this route then give some consideration to whom you tell and how much you tell them – confidentially about the sale is essential inside and outside the company.
After identifying potential buyers you should use your financial advisor to approach them. The sale process is a delicate matter where possible employees, customers and suppliers should not find out about the sale until it is in the completion stage. Using your advisor will help to ensure that confidentiality is maintained and will also mean that you are still able to dedicate your time to other areas of the business.
Your advisor should start by writing to businesses on the shortlist and upon hearing back from them should evaluate their level of interest and whether they are serious. Caution should be exercised at this stage as often competitors use the sale as a ruse to find out information about the company that is usually kept private.
Buyers who have been identified as serious should then be sent the memorandum so they can find out more about the business and what would be involved in its sale. If a buyer is interested after viewing the memorandum, they can contact the company’s financial advisor to organise an initial meeting.
The purpose of the initial meeting is to give the purchaser the opportunity to meet with the vendor so that they can learn more about the business. Ideally the initial meeting should be held on common ground and not on the business premises of either the seller or the buyer – at this stage the seller can ask the buyer to sign a confidentiality agreement if they feel it necessary and a tour of the ‘facilities’ can then be organised.
Deal management and sale completion
Stage one: The offer
Once the purchaser feels they have gained an adequate understanding of the business, if they like what they see they can then submit and offer, usually in written form. Offers letters typically set out the following details:
- The price – how much the purchaser is offering you for your company.
- The form of consideration – what’s to be included in the sale.
- Any long-term considerations such as those linked to future profits.
- A timetable for the ideal date of completion.
Once all of the offers have been received the seller can than take time to consider each one – requesting further information and details where necessary and can then begin the process of negotiations.
Stage two: Assess offers
When buyers receive their offers they must then perform a detailed assessment of what is included. Though one of the first steps a seller should take is to check that the price offered could be met by the buyer (examine proof of financial backing such as loan agreements) – contrary to popular belief it is not the only factor that needs to be considered.
When assessing an offer, sellers should also think about the following:
- Payment - How is the deal going to be structured? For instance is the buyer able to pay single cash payment or are they proposing a deferred payment scheme? How much tax you pay will be affected by the type of payment - so consider which option would be the most tax-efficient for you.
If the purchaser is offering a deferred payment scheme, are they suggesting an earn-out deal? Earn-out deals differ from general deferred payment schemes because the projected total amount can be based upon future business performance. If the business fails to meet the performance targets which both parties have agreed upon then they may receive less than they expect.
Some buyers may offer a combination of cash and shares in the purchasers business, but it may only be worth accepting this type of deal if the shares are in a quoted company, meaning their shares are listed on the official Stock Exchange.
- Tax – Most sellers will have to pay Capital Gains Tax on profit they make when they sell their business.
- Employer responsibilities – Buyers will require assurance that what they are buying is protected from any future liabilities. In an offer a buyer may state that they require a warranty to legally confirm that facts relating to the sale of the business are correct, and indemnities to legally guarantee that the seller will foot the bill if the buyer experiences any losses from specified events. Consenting to warranties and indemnities could help a seller to obtain a higher price for their business but before anything is set in stone they should be very clear about what they stand to lose.
Employer responsibilities also include a level of accountability for staff, and before responding to an offer all employers should familiarise themselves with the Transfer of Undertaking (Protection of Employment) Regulations (TUPE) and take into consideration how the changes may impact company employees. To protect staff, sellers may wish to stipulate within a written agreement that no redundancies will be made for a set period of time.
Stage three: Negotiations
When it comes to negotiations remember that both parties involved in this situation - buyer and seller, are trying to obtain the best possible deal.
Keep an open mind to negotiations. Whilst it is perfectly acceptable to set schedules, issuing ultimatums and unrealistic deadlines to potential purchasers isn’t going to help anyone.
Sellers should ensure that before they begin negotiations, they set out a clear ‘walk away’ price and set of terms. It is best to keep this information to yourself as announcing your cut off price from the offset could mean you are setting yourself up for a fall. However, it does mean that you are able to identify buyers who are clearly on a dramatically different wavelength and who are not going to meet any of your terms and needs.
Stage four: Letter of intent
A ‘letter of intent’, also known as ‘heads of agreement’ is a document that is drawn up after a successful negotiation – stating the key features of the sale deal in commercial language. The purpose of the document is as a point of reference for the advisory teams of both parties, who use it to legally complete the deal.
Generally a letter of intent is not legally binding, though at this stage most sellers will ask the purchaser to enter into an exclusivity period with them that prohibits them from talking to any other purchasers.
Stage five: Due diligence
Once the terms of sale have been agreed upon both parties can then begin driving the deal to completion. At this stage, the purchaser will want to carry out an investigation of the commercial aspects of the business so that they are able to certify the claims a seller has made about their business.
This process is commonly referred to as ‘due diligence’ and more often than not involves the buyer spending some time at the business premises that they are to purchase as well as carrying out off site checks of the following:
- tax compliance
- legal compliance
- customer contacts
- property and asset valuation
- past financial forecasts
- intellectual property accounts.
Sellers should bear in mind that whilst they will need to grant a buyer access to the business premises and financial information, this process should be closely monitored and controlled to prevent it being used as grounds for renegotiations.
Stage three: Completing the sale
As the due diligence checks are coming to an end, both parties and their financial advisors should be in the stages of finalising the sale agreement. The final sale agreement should contain details of the sale (much of which will already be outlined in the letter of intent). Both parties may find that a few drafts will need to be passed around the table before a final agreement that is acceptable to both buyer and seller is agreed upon.
If all stages of the sale have been effectively managed, sellers can feel confident that they have obtained the maximum value for their business whilst buyers will feel assured that they can continue to develop it.
Choosing the right time to sell
Timing is key to obtaining the best possible price when selling a business so it is important to strategically plan the time at which the company is set to go on the market.
The best time to sell your business is obviously when profits are on the up and you are fairly certain you will be able to reach or exceed targets for the foreseeable future. Also take into consideration the sales cycle. Most companies will find that business thrives at a particular time of year depending on the sector and a buyer is far more likely to offer a fair price if they can see that the company is profitable and the order books are full.
Selling a company is usually a once in a lifetime occurrence, so rarely do business owners possess complete knowledge of all that is needed to obtain the optimum result. For this reason, choosing and hiring a team of advisors who are well versed as to the sales process can be one of the most important business decisions you will make.
A team of intermediaries to help you through the sale will ensure that the selling price is maximised, the correct procedures are followed and the sale is completed in the shortest possible amount of time.
Generally an advisory team could consist of the following parties:
An accountant is needed to process the financial aspects of the sale – such as updating paperwork and accounts, helping to value the business, working out the most tax-efficient payment method and limiting liabilities such as Capital Gains Tax.
Legal proceedings such as drafting the sale agreement will need to be carried out by a solicitor.
- Business broker
Most companies looking to sell will use a business broker or a corporate finance advisor during the early stages of the sale.
Business brokers are there to take care of grooming a business for sale, marketing, researching and vetting potential buyers and negotiating the terms of sale on your behalf so that you are free to continue running the business.
Business owners should ensure that they check the training and experience of any advisor they are considering making a part of their team. Ask them what experience they have in selling similar size businesses, how they could help to market your business, what references are they able to provide, what is their strategy for keeping the sale confidential and what services are covered in their fees?
How could an accountant help me to sell my business?
As mentioned briefly above, an accountant will form part of your team of financial advisors who will help to sell you business. An accountant will tackle the financial aspects of the sale, tying up the necessary loose ends in terms of paperwork and accounts whilst also issuing advice and guidance on issues such as limiting liabilities for Capital Gains Tax and making the most of the reliefs available.
Whilst taking on an accountant is not a legal requirement, providing accurate accounts and precise details of company profits and losses is. If a purchaser agrees to take on your business based on figures and paperwork that they later find to be incorrect they are within their rights to seek legal action.
Taking on an accountant will remove some responsibility so that you are able to focus on other areas of the sale and keeping the company running.
For more detailed information about accountants, how they work and where to find one, visit our FAQ page to find out more.
- Gov.uk - Selling your business: your responsibilities
- HM Revenue and customs – Closing or selling a business
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