Building and growing a business is an exciting and challenging undertaking, filled with risks and rewards.
A person’s involvement in a business venture will often conclude with that person selling their shares in the business. Whether that person is retiring or plans to move on to a new venture, the sale should be an exciting time when all the blood, sweat, and tears finally pay off financially and personally.
Selling a business is rarely straightforward, but the rewards for getting it right may be enormous. The following guide aims to help you prepare and understand how a business can be sold in the UK.
What's included in this guide?
|Planning for a business sale
|Different methods of selling a business
|Making sure the business is ready for sale
|Choosing the right time
|Understand your tax position - Tax Reliefs
|Getting a business valuation
|Finding a buyer
|Who to ask for help
Planning for an eventual business sale
Selling a business might feel a million miles away when it is in its infancy, facing challenging times, or targeting growth. However, it is never too early to think about your eventual sale options (or exit strategies).
Jargon-busting: Exit strategies and disposals
- Exit Strategy: This is the plan that a business owner or shareholder will put in place to sell (or dispose of) their shares and ultimately resign their ownership. Types of exit strategy include a trade sale, management buy-out, and transfer of ownership to an Employee Ownership Trust. You can find more on this below.
- Disposal: The sale of a business takes place through the relinquishment of shares. This relinquishment is known as disposal. Selling shares to an external buyer is not the only kind of disposal. Shares can also be sold back to the company itself. They can also be given to a family member (or another unconnected party) as a gift.
Understand your goals: What do you want from selling your business?
Incorporating your exit plans into your business objectives is very important. These goals should inform your strategy to ensure that you get the best deal possible when the time comes.
These goals could include:
- maximising turnover and profitability
- having an experienced and trustworthy senior management team in place to take the reins after you leave
- having a diverse and successful range of products or services
- hitting business targets in a pre-determined time frame, such as your planned retirement date
Different methods of selling a business
There are a variety of ways to sell a business. Which is the right one depends entirely on your goals as a seller, and is impacted by the nature of the business, and other related factors.
- Trade sale: This means selling your business to another company, such as a competitor.
- Transfer to an Employee Ownership Trust (EOT): This means selling the controlling stake of a business to a trust, set up for the benefit of all employees.
- Management Buy-out: When the existing management team pools together to acquire either a total or partial stake in the company they work for.
- Management Buy-in: When an external management team, sometimes selected by the business owner, comes in and buys a controlling stake in the business.
- Initial Public Offering (IPO): When shares of a business are put on sale to institutional investors and the public and listed on a stock exchange.
Make sure your business is ready to be sold
One of the most important considerations when selling a business is ensuring it’s in optimal condition beforehand. This is known as “transaction readiness”
Jargon-busting: what is 'transaction readiness’?
- Transaction readiness effectively means getting all your ducks in a row.
- When selling a house, for example, ensuring it is in good condition, safe, clean, and well-maintained makes a dramatic difference in the price you can ask for.
- A business is very similar – the better condition your business is in, the more likely its sale is to succeed.
What does transaction readiness involve?
Preparing your business for sale, or making it ‘transaction-ready,’ means making your business as attractive a prospect as possible for any prospective buyers. The following are some tried-and-tested ways you can help with this:
- Build out robust, historical management information, going as far back as possible
- Maximise the overall performance of the business
- Ensure any ongoing legal, supplier, or employee disputes are resolved
- Seek help and advice from qualified specialists to take care of legal and accounting responsibilities
- Keep all business accounts up to date
- Make sure the business is structured appropriately
- Assemble a competent and experienced senior management team
Preparing for due-diligence checks
Prospective buyers will conduct due-diligence checks to make sure the business they are looking to buy is what they were expecting.
Ensuring transaction readiness will help your business satisfy these due diligence checks and help prevent a potential buyer from rejecting the deal or lowering their offer.
Due diligence checks will focus on many aspects, such as the existing liabilities of a business, its financial documentation, tax returns, statutory registers, shareholders and their positions, all existing contracts, insurance policies, and assets that may be included with the business being sold.
Important: It’s never too early to prepare for a business sale
Getting your business ready for sale should not wait until an owner’s exit date is approaching. It’s never too early to prepare an exit strategy or to ensure the business is transaction ready.
The areas that help improve valuation and readiness for sale are almost always good practices for the lifespan of the business. The business will almost certainly benefit from these, even if there are no plans to sell in the immediate future.
Choosing the right time to sell a business
Businesses constantly change, as do the conditions in which they operate. When it comes to selling a business, it may be beneficial to try and time your sale well, so that the business and marketing conditions are strong.
Examples of a good time to sell include a period of strong profitability for the company, or a strong economic market with lots of enthusiastic prospective buyers.
Understand your tax position when selling a business
The sale or disposal of business shares for a profit means the seller will have to pay Capital Gains Tax, subject to an allowance. The amount of Capital Gains Tax payable on the disposal of shares varies depending on the shareholder’s Personal Income Tax band:
- Higher rate Income Taxpayers will pay CGT of 20% on business shares and other chargeable assets (excluding residential property)
- Basic rate Income Taxpayers will pay CGT at 10% up to the basic rate band, and 20% thereafter
Tax reliefs when selling a business
Tax is inevitable when selling shares in a business for a profit. Depending on the nature of the business sale there may be valuable tax reliefs available to reduce this expense.
- Business Asset Disposal (BAD) Relief enables a reduced CGT rate of 10%
- Incorporation Relief is available when unincorporated business assets are transferred to a company in return for shares
- When shares are disposed of as a gift, Gift Hold-Over Relief may defer all or part of a CGT liability until the recipient goes on to dispose of the shares later on.
- Business Asset Rollover relief can also enable a deferral of the taxable gains when qualifying criteria is met
Getting a business valuation before the sale
Before selling a business, it is essential to understand what it is worth.
An accurate valuation means you can enter negotiations with confidence in the value of your shares. However, a market valuation is not always guaranteed to be met by a buyer (unless it is sold to an Employee Ownership Trust).
For a business valuation that you can rely on, we strongly recommend speaking to an accountant who specialises in corporate valuations and transactions. Going into negotiations with an inaccurate valuation can put you at a disadvantage and may result in a deal falling through or not meeting your expectations.
While it is not a substitute for an expert valuation, the Shorts Business Valuation Tool can get you started with a rough estimate of what your business may be worth.
Finding a buyer for your business
No business sale can take place without a willing buyer and finding a buyer that is both willing and appropriate is essential for a satisfactory exit.
There are some factors to consider when selecting a buyer, besides how much they are offering. For example: If you wish to safeguard the legacy of your company and the job security of your team, a buyer’s intentions for the business after your departure are important. Do they plan to take over and cease certain operations, relocate staff, or make redundancies?
Finding the right buyer may be a lot more complicated than expected, so we strongly encourage consulting a Corporate Finance specialist for advice.
Teaming up with a solicitor for the sale
Your business is transaction-ready, you have found the right buyer, and negotiated a valuation that satisfies all parties involved. The next step is to conduct the sale itself.
This stage of a business sale can also be complicated, and it is encouraged that you work with a qualified corporate solicitor, who can assist with the various documents, including the purchase and sale documents or any lease agreements involved.
Working with a qualified Corporate Finance accountant
Selling a business is a complex process that can take a long time. Selling a business is the culmination of years, if not decades, of dedication and hard work, so it’s important that you ensure it is done correctly.
This means maximising the value you get, ensuring the sale completes without problems and making sure your tax situation is fully understood.
For this reason, we strongly recommend consulting a qualified Corporate Finance accountant to guide you through the process. The multi-award-winning Corporate Finance team at Shorts takes pride in delivering exceptional and personable services. We apply the knowledge we have gained from years of advising on business sales to every client we work with.
Andy leads the award-winning Shorts Corporate Finance team.View my articles