If you own a business and have found yourself on this page, you may plan to sell or retire. If so, this guide will help you get the best price, structure the sale, and handle essential things like tax with maximum efficiency.
Let’s jump on the topic.
Jump to:
- Preparing your business for sale
- How to value your business for sale
- How to find a buyer for your business
- How to agree the terms of your business sale
- Understanding the business purchase agreement
- HMRC and other considerations when selling your business
- Different types of business sales and what to consider before selling
Preparing your business for sale
Planning properly for the sale of your business can yield great benefits, from getting the best price to minimising the tax you pay. One of the best ways to start is to imagine yourself in a potential buyer’s shoes: What are they looking to get from this deal? And how can I present my business in the best light?
Unless they’re looking to turn a business around, buyers are generally looking for efficient, profitable companies, with good growth prospects. They want to see strong management and clean financial record-keeping.
Knowing what you as a seller want to get out of the sale is also crucial. List your goals and order them by priority, and make sure you’re emotionally prepared for the sale process. It can time-consuming and complex. Preparation is the best way to achieve your goals and manage the feelings that accompany letting go of a big part of your life so far.
On the practical side, think about keeping your customers onside. A solid customer base is important for buyers, so take time to nurture them ahead of time, making sure records and payment information are up-to-date and accurate, and any outstanding invoices have been settled. In addition, if you’ll need consents to go ahead with the sale, from shareholders, landlords or suppliers, for example, make contact early to avoid problems later.
Building a support team is also important. As well as your lawyers and accountants, you may need a valuation expert and a broker or investment banker.
When selling a business, be clear with your employees about your intentions, consulting with them about the process and the likely effect on them. If you have a share incentive plan in place, offer them attractive incentives to sell their shares back to you ahead of time.
Finally, prepare a pack of necessary information such as recent (up to 3 years) financial statements, lists of assets, details of leases and major contracts, and customer and supplier lists. The pack should also include an operating manual for the company plus an organigram of management and employees and their roles.
Finally, make sure your business premises are presentable and in good repair.
How to value your business for sale
Before inviting offers to buy your business, know what it’s worth. You can either do this yourself or appoint a valuer. At the same time, you can build a picture of its market position, financial strength and any opportunities/risks to future profits and growth as a marketing tool.
You can get a business valuation from several sources, including accountants, business brokers and investment banking firms. You’ll generally need to provide 3 years of financial information, so make sure your records are in good order and easy to understand.
Provide supporting receipts for all expenses, operational and non-operational.
In terms of the valuation itself, there are several valuation methods. For example, one way to value a business is using a multiple of EBITDA (earnings before taxes, depreciation and amortisation). This shows the company’s ability to generate income. In addition, other factors influence a company’s price, including the value of its assets and the sale price of comparable businesses.
It's important not to overestimate your business value as you may deter potential buyers. Bear in mind also that you’ll need to be able to justify the price you’ve set.
How to find a buyer for your business
Once you’ve prepared your business for sale and have a valuation, you can market your business. You can accomplish this via a professional such as a broker, or market the business yourself through mainstream or social media, or via your network of contacts. The method you choose will depend on your business sector, where it’s located and its size.
Once you’ve got some interested parties, stay in contact with them to keep the sale process going and have them sign an NDA or confidentiality agreement to avoid information about your business sale leaking out to competitors, employees or even the press. Put all agreements you make with them in writing.
How to agree the terms of your business sale
The terms of a potential deal should be written down clearly so both sides understand what they mean. Terms to include are the proposed timing of the sale, the sale price, what assets are included and how the price will be paid.
If you’re not getting a lump sum up-front, how will installments be made and what will you do if the buyer won’t pay? Will you be required to work in the business, and if so, for how long? Will there be any restrictions on your ability to operate in the same market in the future?
Understanding the business purchase agreement
The business purchase agreement describes the sale terms. The goal is to protect the interests of both the buyer and the seller. Your lawyer will draft and negotiate this alongside you and your team.
Here are some of the essential components of the agreement:
- The price, including any future installments
- Disclosures about the business being sold, including details of the financial performance, ownership structure, and any legal issues
- The condition of the business and any assets
- Employee issues and any disputes
- Lists of assets and liabilities, including property and equipment, IPR and customer lists
- Any pre-conditions to the sale such as obtaining finance, getting approvals or settling disputes
HMRC and other considerations when selling your business
Sole traders
If you’ve been a sole trader, close your personal tax affairs. As a first step, let HMRC know you’re selling, and cancel your Class 2 National Insurance contributions. Following the sale, you’ll complete your final year’s self-assessment return, plus pay any outstanding tax and NIC,
Partnerships
If you’re a member of a partnership selling their share, you’ll complete your final self-assessment and pay tax and NIC owing. If the partnership is being sold, the nominated partner also fills out a partnership tax return.
Limited companies
If you’re selling up your entire shareholding, new directors will need to be appointed in place of your team, and you’ll need to make certain filings to HMRC and Companies House
Paying CGT
If your company is worth more than you paid for it, Capital Gains Tax will be due on the sale. There are some tax reliefs available that reduce the amount of CGT payable.
Different types of business sales and what to consider before selling
If you’re selling a private limited company, you can either sell its shares or its assets. With a share sale, the buyer acquires the shares, and the company carries on business as before. With an asset sale, the buyer gets the assets and any liabilities associated with them. [link to second article]
A share sale represents a clean break for you as the business owner, and it’s less hassle than selling each asset. You will however have to give the buyer certain promises to make good on any risks that emerge post-sale. The employees will be transferred to the buyer along with the company, and all the shareholders will need to consent.
With an asset sale, the buyer assumes less risk, as the company is closed after the sale. The most common assets to sell are customer lists, equipment and machinery, property, goods, contracts, IPR, goodwill and IT systems. The buyer can choose what assets they take, and from the seller’s perspective, they don’t need to involve the shareholders. The seller may end up paying more tax in an asset sale in terms of corporation and CGT.
If your business is a partnership, you’ll sell business assets rather than shares. This can be more complex than selling a company, as each partner may have different rights and ownership structures.
Finally, it’s also possible to sell a company with financial problems or is technically insolvent. In conclusion, the best way to ensure success when selling your business is to speak to expert advisors from the outset. They will help you lay the foundations for an efficient and fully compliant sale transaction. For more information on selling your business, get in touch on 0800 689 1700, email us at enquiries@harperjames.co.uk, or fill out the short form below with your enquiry.
