How to sell your business
How do I sell my business?
First things first. Why do you want to sell? The most common reasons are:
- To realise funds for your retirement.
- To move onto pastures anew.
- Health Issues.
- Seed money for another investment.
- Change of lifestyle
Remembering why you are looking to sell in the first place will help keep you in the right frame of mind throughout the sales purchase. Ill-health of yourself or a loved one might dictate the need for a quick sale. There are many factors to consider that can substantially save you money with the right due-diligence and so no matter what your reason is for selling, be sure to take extra care and attention when finalising the small print on any deal.
The timing and motivation for a sale are crucial and, so long as the sale is not precipitated by a personal tragedy or ill health, planning and focus are essential. Bad planning, poor preparation and the wrong choice of professional advisors (business brokers, accountants and solicitor) can have a detrimental effect upon you exit value and may incur you in unnecessary costs, delays and frustration.
What types of sale are there?
There are two basic types, mostly determined by your trading style. For sole traders and partnerships, the only route is to sell the goodwill, assets and stock contained within your business.
If you have a private limited company, you can either sell the shares, or sell its trading assets. The latter is simpler but not favoured by sellers, mainly for tax reasons. Either way, advice from your accountant and solicitor should be obtained before marketing and might be required again should you buyer’s offer include a different structure.
a) Sale of goodwill, assets and stock
This is essentially the sale of all of the assets which the business owns (partners and sole traders exist only as people and people cannot sell themselves). Some of these – the fixed assets – are tangible items such as property, plant and machinery. Other – e.g. stock, are also real assets to which there is clearly a value.
Goodwill is different. Not directly tangible or visible, it is unlikely that it will appear in your accounts. Its value is determined by negotiation and can be a matter of substantial debate. The value of goodwill is a factor of the businesses historic trading history and its potential for the future. Future incomes and cash flows are fundamental to the calculation of goodwill; the more robust they are the easier it is to support value. The aggregate value of the fixed assets and goodwill is often called the ‘enterprise value’. This is a monetary value that encapsulates all that is good about the business; products/services, customers, systems, people, reputation and much more. The enterprise value achieved for your business excludes marketable stock and also any fixed assets that are not to be transferred, e.g. your private car. Stock is valued separately as part of the transaction, agreed between the buyer and seller, but based on the lower of cost or net realisable value, and paid for on completion of the sale.
Stock can be a large proportion of the transaction value and needs to be carefully managed. Beyond this, the seller normally retains the cash and debtors (up to the point of sale) and is responsible for paying off all creditors, tax and any third party debts, including HP. On completion, your solicitor will prepare a statement which will take into account any advance payments for such things as rent, rates, holiday pay, forward advertising, warranty reserves etc.
A point to watch is the apportionment of value between fixed assets, leasehold interest (if applicable) and goodwill. The split will need to be determined as part of the transaction and your accountant will need to be consulted before it is agreed as there are some potentially adverse tax considerations.
b) Share Sale
With a share sale, the legal entity continues to trade as before, only with the new shareholders and directors. Goodwill, fixed assets and stock are included in the sale, together with all trade debtors, cash, trade creditors, third party debts, and tax liabilities. The company doesn’t change – only the ownership – and so the buyer assumes the responsibility of the bank accounts, contracts, and any liability towards employees and HMRC; even the VAT registration remains the same.
This means that all assets and liabilities transfer to the purchaser, without limit. The new shareholders become responsible and accountable for all liabilities whether caused out of naivety or malice. The purchaser thus needs to be protected from the past trading history of the previous owners and therefore the legal and accounting work on a share sale is generally greater than when selling goodwill, assets & stock. Warranties and indemnities go some way towards affording protection, but this inevitably means that the need for due diligence and detailed documentation is greater.
What about the employees? In either type of sale, employees have the right to stay with the business. In a share sale, however nothing changes for them. In a goodwill, asset & stock sale, they transfer to the new owner under TUPE (Transfer of Undertakings and Protection of Employment legislation). This means that rights acquired by employees under the previous ownership transfer, automatically, to the new owner. Further considerations regarding employees are given below.
What am I selling?
Businesses are complex, abstract entities which own all sorts of assets. When you sell, you can sell all them, or just some. What are they?
Goodwill is the perceived value of future income and profits. It is essentially based on expectations, secured as far as possible via contracts with customer, employees and others.
Its main ingredients also include supply chain, branding, websites and domains, and the assortment of products or services on offer e.g. potential copyright. Aspects of goodwill which constitute intellectual property to which rights have been secured, can be valued (and sometimes sold) separately.
b) Fixed assets
Land and buildings, plant and machinery, fixtures and fittings.
c) Working capital
This is the balance between current assets such as stock, cash at bank and money due from debtors, less current liabilities such as tax liabilities and money to be paid to creditors. If the purchaser is acquiring the company by buying its shares, then the value of working capital to be paid on completion will have to be negotiated.
How do I find buyers?
If you’ve chosen to sell your business finding the right buyer is of utmost importance. Your business is a product of your hard work and so for your brand and existing staff, it’s a good idea to find someone that you trust to carry on its legacy. There are many things you can do to find yourself the perfect buyer for your business.
Get an evaluation
It’s all well and good telling a buyer what you think your business is worth, but without credible backup, it’s likely that they won’t take your word for it. With a formal evaluation, you can provide buyers with tangible evidence that your business is worth what you say it is.
Put the word out
You can spread the word of your intent to sell via friends, acquaintances, and business contacts, even trade competitors if you’re brave enough. Someone may know someone who’s looking to invest, or that’s interested in your business. If you wish to keep the sale confidential (from staff, competitors, customers, and suppliers) it will be challenging to do so when seeking a buyer yourself.
Using either dedicated business forums or brokers, you’ll be able to get the word out to a wider circle of contacts that you’re intending on selling your business. This will help to put your business in front of people who may not have seen, or heard of your company, but may see the potential in purchasing it. Any good broker will have an extensive database of buyers and their advisors and are able to research trade buyers, and crucially make the confidential approaches you can’t.
Please don’t underestimate the complexity in selling a business, you will need skills and knowledge that you don’t have, learning those skills on the run can be expensive and potentially damaging.
What tax do I pay?
As business owners, we know you’re no stranger to tax. Selling your business is no exception. When there are deals on the table, it’s vital that you consider the tax implications associated with the intended transaction. You will not personally achieve the headline value as there will be tax to pay to HMRC and professional fees to pay
It is essential to seek the advice of a financial advisor for tax advice as there is no one size fits all solution, both your company and personal circumstances need to be taken into account. To give you an idea, when selling your business in the UK, you’re likely to pay UK capital gains tax on the profit you make when selling your company. But on the plus side you may well be able to claim Entrepreneur’s Relief.
This is true regardless of whether you’re a self-employed sole trader, in a business partnership, or own shares in a limited company.
Selling a business can trigger a number of tax obligations, this is often a complex calculation which needs careful thought and planning and the structure of the sale can often be managed to mitigate tax liabilities. Investment in tax advice is always painful but your expert advisor will understand the complexity and intricacies of entrepreneur’s relief and other tax issues. Their advice if adopted will pay dividends and minimise your tax liability. Brokers understand the tax issues but would never provide advice on these complex matters other than to direct you towards a qualified specialist.
However, don’t allow the tax to be the ‘tail that wags the dog’. You need to be mindful of the tax position, but it must not deflect you from the ultimate objective of selling your business at the best possible price within your timescales. Be mindful that the purchaser will often have different tax considerations which may be equal and opposite of yours. The art of successful negotiation is to ensure that both buyer and seller are comfortable and agreeable with the outcome once all their tax has been paid.
Do I get to keep the cash in the business?
Whether or not you get to keep the cash in the business will depend on the type of the sale.
For a goodwill and asset sale the cash, trade debtors, creditors, and business taxes remain the property of the seller. Once all the bills are settled and tax paid the net cash in the bank is yours.
In a share sale the situation is much more complex and fluid. In simple terms, you can either distribute any surplus cash by means of a pre-completion dividend to the shareholders or sell the surplus cash to the purchaser as part of the working capital calculation. As there are different tax implications depending upon the approach, proper advice is essential.
In the case of share sales there is a recognised phrase, ‘Debt Free Cash Free’, this effectively means that you will keep the cash in the business and be responsible for paying off any third-party debt, bank funding etc. Any surplus cash in the bank pre-completion can be used to pay off these third-party debts and any director’s loan accounts (tax efficient). The final surplus cash balance can be taken as a dividend before the sale is completed or included in the price or a combination of both. Your accountant can advise you on which is most appropriate in your case.
In simple terms, you don’t just take the cash at the bank as a lump sum. However, it is wise to understand how retained profit up to the point of sale is treated when you agree on the price.
When do I get paid?
In an ideal world, every seller would get paid for their business in full on legal completion of a deal. In a realistic one, this may not always the case. Buyers may seek to make payments after the sale for differing reasons:
Deferred payments: Simply put, the buyer doesn’t have or can’t raise the funds or simply doesn’t want to pay for your business outright; or
Earn-out: The final price of the business depends upon its future performance under their ownership. Often this is tied to some specific risk the buyer has seen.
Both deferred payments and an earn-out carry high risks for the seller. Before terms are agreed, it’s a good idea to discuss with an experienced advisor on how best to proceed. Another way to understand what your risk might be, and how you can overcome it, is to take our Value Builder Score. This will benchmark your business and confirm how ready it is for sale.
How long do I have to work in the business after I have sold it?
How long you continue to work in the business will depend upon whether or not the business or the buyer still needs you. If you still have a full-time role, some buyers will want you to stay on to ensure the takeover is as smooth as possible. However, if you find yourself in this position, expect payment for your time but be mindful that the purchaser may want to pay for the business over time as an ‘earn-out’. This is can be high risk and one should ask the question ‘am I able to influence the performance of the business post-sale?’.
If you have a full management team and your current position is as the overall leader, it’s likely that your exit post-sale can be much quicker. Naturally, this is the most preferred option as it can be hard to accept that the business is no longer yours and so things aren’t to be done your way. Running “your” business for someone else, is an often-frustrating position.
If you opt to stay on and work at the business, you might be engaged as either an employee (for long-term or full-time situations) or a consultant (for part-time or short-term requirements). The choice is down to circumstances.
How confidential is the sale?
If you’re looking to safeguard the information about the sale of your business, then it is preferable to ask potential buyers to sign a non-disclosure agreement (NDA). If you’re selling through a broker, any credible middleman will ensure this is in place for you.
The initial information that is released about your business is often referred to as a teaser of flyer. It provides enough detail to outline the opportunity but not enough that your businesses identity is revealed. Of course, the main intent of the teaser or flyer is to generate interest and so it pays to include pertinent details. For Business to Customer (B2C) businesses, if the business is situated in a desirable location in a footfall rich area, this will be useful information to share. For Business to Business (B2B) businesses, however, details tend to be on a much higher level. An experienced advisor will provide guidance on the balance.
How it works
Once a buyer makes an enquiry, the first step is to put the NDA in place before the release of any further information regarding both the business and sale. This legally binding contract restricts the use of information to the purpose of acquiring the business and allows data to flow between an acquirer and their advisors easily. Any buyer should not approach your staff, suppliers and customers unless they have your approval.
Once the NDA has been signed, the potential buyer will be provided with an Information Memorandum. This is a working document that can name and describe the business in detail, alongside limited financial information or summary, but can still be ‘blind’ to the name of the business or its exact location, preferring this to be disclosed at the next stage.
To put forward the right balance of information, these documents can include some or all:
- Brief company history
- Current operations
- Customer base, but not names.
- Sales and marketing activity.
- Property and locations.
- Employee numbers.
- Key staff.
- Financial summary.
- SWOT analysis (Strengths, Weaknesses, Opportunities, Threats).
- Current trading.
To maintain further confidentiality, an Information Memorandum (IM) typically won’t include specific employee and customer names.
When do I tell the staff?
It’s a good idea to ensure any sale is set in stone before disclosing the news to the rest of the organisation. If the transaction is still up in the air or if you’re hunting for a buyer, telling your staff could cause unnecessary stress and unsettle both employees and yourself.
If you are forced to tell them early, give them a specific timeline and as much up-to-date information as possible to appease their concerns. Being kept in the loop will reduce stress and minimise fear surrounding job security. Your main responsibility to keep your employees confident that their job is not at risk (indeed you are seeking to secure their future) and stop them leaving the business when they don’t need to.
At the end of the day, it is your decision. There is no simple answer as to when you should tell your staff about a sale. Sometimes you may only keep senior key players in the loop until the deal is done. You know your staff better than most and unless under a legal obligation, it really is a judgement call. On balance ‘need to know’ is often the best approach, by informing even one member of staff you run the risk of others being told which can cause resentment and tension. An experienced broker can help with this dilemma.
When might I have a legal obligation to communicate? This will entirely depend on the type of sale & size of your work-force. Employment legislations determine the sequence of events and legal advice is a good idea on this topic, but as an overview:
- a) Share sale: There is no legal requirement to tell your staff about a change of owner as their employment status usually does not change. This is a contributing factor to why some business owners & purchasers prefer a share sale.
- b) Goodwill and Asset sale: Under Transfer of Undertakings and Protection of Employment (TUPE) employees are considered to have continuity of employment and their statutory rights are protected and they have the right to consultation. The purchaser has the ability to change work practices and terms of employment, but only after consultation and with the agreement of the employees. Unilateral changes will have significant financial implications for new owners and could lead to claims of constructive dismissal.
In this circumstance, as there are a lot of moving parts and intricacies involved with TUPE, it’s best to seek expert advice. This is especially true if employees are affected (e.g. proposed redundancies) when considering the deal terms to ensure any costs are allowed for in the sale.
What about solicitors’ costs?
Typically, a goodwill, asset & stock sale will be less costly than a share sale. Either way, your legal costs are unlikely to be contingent and you should expect to pay for all the time incurred from the point of instruction. Law firms will have variable rates depending upon their location and experience, however it is folly to choose the one with the lowest hourly rate. Your chosen solicitor is there to keep you ‘safe’, protect your interests and complete the deal as there are many pitfalls associated with the legal process. It is also important that you trust your solicitor and have some good rapport as, at times during the legal process there will be judgement calls which will require guidance and support and a pragmatic and commercially aware solicitor is essential.
The biggest factor influencing professional costs is the size and complexity of the deal. A solicitor with a higher hourly rate can be more experienced and therefore achieve the result in less time. That said, don’t use an expensive solicitor to conduct basic housekeeping, so be sure to get your business affairs in good order prior to going to market. Your business broker should be able to provide a simple checklist to ensure that all bases are covered.
A solicitor typically will charge between 3% and 5% of the final business sale price plus VAT (which may not be recoverable). The more prepared you are the easier it is for the solicitor to see what needs to be done and so, when a sale is agreed, to quote a fixed price for handling the transaction. There will be additional disbursements but at least you have a budget to work to.