How to Sell a Business – A Simple Guide

Those looking for advice on how to sell a business can be excused for finding all the information somewhat dizzying.

Like most things, selling your company can be tricky if you’ve not done it before. There are multiple pitfalls that can arise if corners are cut, or you make the wrong choice when enlisting an advisory service.

A good business advisory service will be able to help you with how to sell a business from start to finish, but it’s worth arming yourself with the knowledge of what to expect before you sell what may be your livelihood.

For those that are certain that a sale is the best option for them though, there are still plenty of things to consider before you can shake hands on a deal.

 

 

What is your motivation for selling?

In the midst of finding out how to sell a business, it can be easy to lose sight of the reason you’re actually selling your company. This can be dangerous, as your motivation for selling should inform how you approach your sale.

Those that are selling up because of ill health or creeping debts may need to sell quickly, with the actual relinquishing of responsibility the main driver.

For business owners hoping to seed money for another investment, or free up funds for retirement, their main aim will be to hold out for the best possible offer they can attract, even if it takes a little longer.

 

 

What methods can I use to sell my business?

When it comes to how to sell a business, private limited companies usually have the option of two different types of sale: a share sale, or the sale of goodwill, assets, and stock. In terms of tax efficiency, the former is usually the best option for the seller, while an asset sale might be more favourable for buyers.

 

Share sale

A share sale sees the buyer acquire the shares of the company and assume control of everything. The business itself isn’t affected at all, the only change is in the owner.

This is often the preferred way of how to sell a business, as any buyer takes it on as an ‘ongoing concern’, with all the benefits and, indeed, issues that accompany the business.

It can also be preferable to an asset sale not just from a tax perspective, but also because its far more discreet. From the outside, it’s near impossible to tell that the business has been sold at all.

Because the buyer takes on more risk with this type of sale, be aware that they may request warranties, indemnities, or even a discount.

 

Goodwill, assets, and stock sale

An asset sale can either be the simplest method of how to sell a business, or the most complicated depending on what your business has to offer. You can decide to keep hold of aspects of your business that you don’t want to sell, or can even sell separate assets to different sellers to maximise your profits.

This method will usually see you have to pay two levels of tax, so can be more costly. You could also be left with all the less appealing facets of your company after a buyer has cherry picked what they’d like from your assets. This could see you lumbered with the responsibility of formally dissolving the business, or tackling outstanding debts or liabilities.

If you have a number of contracts, properties or employees involved in the deal, the complexities of the sale can soon stack up.

 

Things to consider before selling your business

Valuing your business:

Before putting your business up for sale, it’s essential to determine its worth.

Several factors come into play, such as financial performance, assets, intellectual property, customer base, and growth potential.

You should always seek professional assistance from those that specialise in your particular industry or niche to get an accurate valuation. Understanding the true value of your business will help you set a realistic asking price.

This will take into consideration aspects of your business such as current market trends and industry expectations. It will also look at the value of assets you may have built up along the way.

For example, imagine you own a successful software development company with an established client base. A business valuer would assess your company’s revenue, profitability, contracts, and the intellectual property behind your software to arrive at a fair valuation.

Request a free estimated valuation from one of our advisers today Free Company Valuation Calculator →

 

Assemble a team of advisors:

Selling a business can be complex, so it’s crucial to have a team of experienced professionals to guide you through the process. This team may include a broker, accountant, lawyer, and tax adviser. They will help you navigate legal, financial, and tax considerations while ensuring a smooth and successful transaction.

An example of this could be a restaurant owner looking to sell. A business broker specialising in the hospitality industry can assist you in finding potential buyers and negotiating the deal, while an accountant will ensure your financial records are in order.

 

Preparing financial documentation:

Prospective buyers will want to scrutinise your financial records, so it’s essential to organise your books and financial statements accordingly. Ensure your financial documentation is up to date, accurate, and transparent. Buyers will be more inclined to proceed if they have confidence in your financial performance and projections.

For example, suppose you own a manufacturing company. You would need to compile financial statements, including balance sheets, income statements, and cash flow statements, for the past three to five years. Provide detailed information about your assets, liabilities, and accounts receivable/payable.

 

Marketing your business:

To attract potential buyers, creating a comprehensive marketing strategy to showcase the value and potential of your business is really important.

Prepare an enticing summing up document or a landing page on your website or social media that highlights your company’s unique selling points, financial performance, growth prospects, and competitive advantage.

You can also advertise your business through various channels, such as industry publications, online marketplaces, and social media platforms.

For example, if you operate a boutique clothing store, your marketing strategy could include creating a professional website, leveraging social media to engage with potential buyers, and listing your business on relevant e-commerce platforms.

 

Negotiating and closing the deal:

Once you’ve found a potential buyer who shows genuine interest, it’s time to negotiate the terms of the sale.

You should seek legal advice to draft a comprehensive sales agreement that covers crucial aspects like the purchase price, payment terms, non-compete agreements, and any post-sale transition arrangements.

Work closely with your advisers to ensure a smooth transition and complete all necessary legal and financial obligations.

An example of this could be as the owner of a graphic design agency, you might negotiate a deal where the buyer pays a portion of the purchase price upfront and the remaining balance over a specified period.

Additionally, you may agree to assist with the transition. You can do this by providing training or consulting services for a few months after the sale.

 

How to value a business in the UK

There are several factors considered when valuing a business, and it’s highly recommended to have a specialist conduct this stage of the sale process in order to get it right. The value of your company can go far beyond that of your assets such as property and stock.

Entry cost is one method used to calculate a company’s value. If the cost of setting up a similar business would cost significantly more or less than buying your existing business, then this could decrease or increase your company’s value accordingly.

Profitable businesses may have their value decided by a price-to-earnings ratio. This calculates net profits and multiplies them to predict how much the company is likely to make. If there have been sales of similar businesses in your sector recently, valuations may be influenced by the prices they went for too.

There are a number of ways in which to value a business, completing our valuation calculator is the first step towards obtaining your company’s market valuation allowing you to find out what you could potentially get for your business.

Get a Free Company Valuation →

 

How to find a buyer for your business

A proper valuation with paperwork and evidence to back up the price will increase your chances of finding a buyer. So too will enlisting the help of a business sales broker or advisory service. Such companies will have an extensive list of contacts and potential buyers that they can approach straight away.

It can be tempting to try to find a buyer yourself and avoid the cost of recruiting the help of a third party, but buyers can often receive more by using a specialist service. This is because sellers are unlikely to have the reach and list contacts that a brokerage has access to.

Even if you are able to find a buyer on your own, by virtue of approaching more potential buyers, a broker is likely to find somebody with a better offer, or even several interested parties. Finding multiple people interested in your business is ideal, as it can potentially result in a bidding war.

 

Prepare your business for a sale

Just as you’d tidy a house before listing it, you need to present your company in the best light to attract more interest. If there are any small, inexpensive repairs that need to be made to your premises, it’s a good idea to have these wrapped up before sale.

You’ll also benefit from having all of your paperwork in order. The main concern for any potential buyer is that there may be hidden problems within your business. By providing them with transparent documents that show exactly how your company has been doing, you’ll remove a layer of hesitancy from many buyers’ minds.

 

How should I prepare my business for sale?

Get your financials in order:

Ensure your financial records are accurate, up to date, and well-organised. This will instil confidence in potential buyers.

Streamline operations:

Simplify processes and eliminate inefficiencies to make your business more attractive to buyers. Showcase how your business can operate smoothly even under new ownership.

Diversify your customer base:

Reduce dependency on a single client or a small group of customers. Broaden your customer base to demonstrate stability and growth potential.

Document key processes:

Create standard operating procedures (SOPs) that outline critical business operations. This will make the transition easier for the new owner and enhance the value of your business.

Focus on growth prospects:

Identify and present potential areas of growth to prospective buyers. Highlight untapped markets, emerging trends, or innovative products/services that can drive future success.

 

Vet your buyers carefully

This is less of an issue if you’ve used a brokerage service as they will have checked into the buyer’s credentials beforehand. For those going it alone though, it’s a common source of frustration to get some way through the selling process before your buyer decides to pull out. Your ideal purchaser should have no problem with funding, and some experience of running a business beforehand.

 

Be aware of tax

If the previous steps hadn’t already made you think twice about going it alone, the sheer number of different tax considerations in a business sale might.

There are several tax implications triggered when selling a company, and these can reach to both your business and personal circumstances. Add on top the fact that your buyer will likely have similar tax considerations, and you can start to see the issue.

UK business sales will see capital gains tax taken from any profits, but some companies may be entitled to claim Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) which can reduce this somewhat.

 

 

You may not be paid straight away

It’s always preferable to be paid in full at the point of completion, but there are many business sales that are paid for in the weeks or months following the handover.

The two main options for buyers are purchasing via deferred payments or by earn out.

Deferred payments are self-explanatory. If the buyer doesn’t possess the funds to pay outright, they can sometimes negotiate a deal to pay over instalments.

An earn out payment is usually negotiated if the buyer is nervous about a particular risk involved with your business. This sees the final sale price being determined on how the company fares under the new owner’s stewardship.

Both options are great for the buyer, but less so for the seller. They leave the seller exposed to an element of risk that’s only increased when attached to the sometimes-volatile world of business.

If a full payment isn’t possible, try to secure as much of the fee upfront as you can to mitigate any potential problems. Again, an experienced business sales advisory service can help with any negotiations to minimise your risk.

 

Managing confidentiality

For businesses that employ a workforce, a degree of confidentiality may be required. Hearing that the company is up for sale can spook employees and even lead to several departures in the middle of a potential deal. You might also prefer that suppliers and clients don’t hear that you’re thinking of selling, lest they withdraw their services/orders in fear that they might be left in limbo.

Sales conducted through a third party will usually involve potential buyers being given partial details of a business with just enough information to spark interest without being able to identify the company. When a buyer eventually comes forward, NDAs (non-disclosure agreements) can be put in place to make sure that nothing is unduly disclosed.

 

How to manage staff concerns

In general, it’s best not to divulge too much information before any deal is solidified. In the case of share sales, there’s no legal requirement to even mention it, as your workforce’s employment status won’t change at all.

You may however, feel obliged to let your workforce know of any impending changes. If so, ensure that they’re kept in the loop regularly, as silence can lead to rumours getting out of control.

With asset sales, there may be some legal complexities involved with TUPE (transfer of undertakings and protection of employment) when it comes to the handing over or change of employment status of your workforce. It’s not advisable to handle such matters on your own. TUPE regulations alone merit the use of a business transfer specialist.

 

Create a heads of terms document

As soon as a deal has been agreed in principal, you should look to have the buyer draw up a heads of terms. Although it isn’t legally binding in most cases, it will provide clarity and reassurance to both parties during the sales process.

The heads of terms document should document everything that the buyer believes to be part of the sale. If there’s any confusion or disagreement at this stage, it’s time to thrash out the fine details before any businesses or funds are relinquished.

The whole idea behind the writing of this document is to make sure that everybody is in agreement about what the deal involves. This avoids confusion and issues further down the line that can derail the whole transaction.

Don’t be concerned about asking for some amendments if you’re not comfortable with the terms. It’s not unheard of for a head of terms to have several redrafts before all parties are happy.

 

Due diligence is key to a deal

Not only will you have to research your buyer, but they’ll also want to dissect every inch of your business to check for hidden issues. If you’ve prepared your business for sale properly, there should be little to worry about here, as all of your dealings will already be out in the open, and your premises will be in pristine condition.

Buyers that find anything that isn’t to their liking while performing their due diligence, may ask for a reduction on the price, or pull out of the deal altogether. If a reduction is requested, try to think about how much a particular issue might cost to remedy yourself, and offer to have it fixed instead if it seems less expensive to do so.

 

How long does it take to sell a business in the UK?

As you might expect from a process with so many variables, it’s difficult to give a timeframe with any degree of confidence. While some can be wrapped up in as little as three months, others can drag on for a couple of years.

In general though, a small business conducting a straightforward sale should expect to complete a sale within six months. For larger companies, the process can take a lot longer: typically reaching over a year.

If you’re faced with a long wait while a deal goes through, use the time wisely by preparing your company to fly through any due diligence checks. The last thing you need after a 12-month wait is for the buyer to pull out over something found in their checks.

 

Still wondering how to sell a business?

We’ve helped countless business owners to assess their options when they’ve decided to sell up. By calling for free, no-obligation advice from one of our friendly specialists, you’ll be given all the guidance you need for the best route to take for your particular business.

As specialists in business sales, we can help you to discover the best possible buyer. Call us on 0800 975 0380, or email [email protected] for a free consultation.