You’ve built your business from scratch, and reached a stage that many don’t: considering a sale.
It’s not a small feat to get here!
In fact, in 2022, around 345,000 UK businesses shut down. These closures were due to several reasons, like a rise in economic pressures, high energy costs, and increasing supplier prices.
Therefore, you must time your business sale carefully. If you wait long enough, your business might face closure instead. This may cause you to lose out on valuation opportunities and continuation of legacy.
This is why, as a business owner, selling your business should be a carefully planned, strategic decision.
What are the Key Steps to Selling a Business?
When selling your business, don’t just sit back and wait for things to happen. Planning is key, so take charge of the process to make all the difference.
We’ve mapped out six steps to guide you through the journey of selling your business:
Understand your business’s value
Hire a professional valuator to assess your business’s worth. This will be based on financials, market position, and growth potential. They can spot value in places you might overlook, while avoiding overvaluation.
Plan for the sale in advance
Once you understand your business’s value, plan two years in advance to groom your business. Make tough decisions and resolve issues before the sale.
Prepare the key sale documents
The sale process will require you to prepare the following key documents:
- Non-disclosure agreement
- Heads of terms
- Share purchase agreement (SPA) or business purchase agreement (BPA)
- Disclosure letter
- Business valuation report
Research and find multiple buyers
You can research industry competitors, strategic partners, or international business interested in acquiring your company.
However, hiring a professional or a broker is beneficial. They identify strategic fits to find multiple buyers and maximise your sale price.
Choose the right platform to sell your business
Selecting an appropriate platform expands your reach of buyers. It connects you with a diverse pool of buyers, increasing the chances of a sale.
If you’re a business owner looking to optimise your business sale strategy, Mergers Acquisitions UK provides you personalised solutions! It has a team of business valuation experts, and excels at connecting small business owners with larger corporations.
The firm provides various services, from helping you strategize your business exit plan to transition management services.
Our services also include business valuations, M&As, leveraged buyouts, and equity investments.
Negotiate and manage until finalisation
The final stages of a business can be nerve-wrecking, but you must stay organised! Respond quickly to buyer requests, maintain weekly adviser calls, and make sure all the legal documents are ready.
Lastly, set clear price limits and be confident throughout the sale for better terms.
When is the Best Time to Sell a Business?
Knowing when to let go of your business can be an intimidating topic. To sell at the right time, keep monitoring the market and your business’s financial health. You should aim to sell your company when it’s performing well, bringing in profits, and growing.
This is because timing your sale during a low-value period seriously devalues your business. If you want to get most of your business value, consider these factors:
| Business value boosters | Business value detractors |
| Steady profits and sales | Declining profits or sales |
| Stable markets and management | Economic downturns, inflation, and higher interest rates |
| Economic stability and buyer confidence | Instability in ownership or management |
| Lower interest rates and favourable tax conditions | Litigation or regulatory issues |
| A larger pool of buyers | Reduced buyer confidence |
Hence, the best time to sell your business is when both the internal and external factors align. This provides you the maximum business value. So, keep an eye on the signals above.
What are the Best Ways to Sell a Business?
There’s more than one way to sell a business. Finding the right method will influence everything from how much control you have in the process to the final sale price. While each option has its own pros and cons, you must assess what suits you best.
You only get one chance to sell your business, so it’s important to make sure you do it right.
The best ways to sell a business are:
Direct sale
A direct sale is when you sell your business directly to the buyer without a middleman or an intermediary. The sale is typically made to another company, investors, or to a family member.
In this type of sale, the business owner has complete control over every aspect of the sale. They also save on broker commissions and fees. However, it can be difficult to access a larger pool of buyers.
Additionally, if the sale results in reduced competition in the market, it is subject to investigation by the CMA (Competition and Markets Authority). It aims to prevent the breach of competition law in the U.K.
If you’re a business owner with a buyer pool already identified, this method of business sale suits you best.
Sale of shares
In this type of sale, the buyer acquires the majority of the shares of the company. They take ownership of the entire business, and the company continues its usual business operations.
For the seller this can be a clear exit from the business. The buyer is also protected from any liabilities that may arise after the sale. Hence, the business owner must be aware of their post-sale duties in this type of business sale.
There are also certain legal implications the seller must be aware of:
- Capital Gains Tax
- Warranties and Indemnities protecting the buyer post-sale
- Compliance with wrongful trending, malpractices, and unfair preferences to creditors
Sale of shares is ideal for business owners who want a full exit while allowing the business continuation in new hands. It’s best suited when you want the buyer to take on all liabilities, unlike a direct sale, where buyers pick assets selectively.
Partnership sale
This is where you sell your ownership interest in a business partnership to other partners or buyers. The partnership remains intact but the ownership changes along with your decision-making power.
The business’s future can change depending on the new owner’s interests and plans. However, the vision and legacy can be maintained based on the sale’s structure.
This type of business sale is appropriate for those who want to sell their business to existing partners whom they trust.
Some laws to be mindful of are Partnership Act 1890 and Income Tax (Trading and Other Income) Act 2005.
Business brokers
Business brokers are middlemen who help sell SMEs. They handle the process of finding buyers, managing negotiations, and the overall sales process. They deceive a percentage of the sale price once the sale is complete.
The business operations and continuation depend on the new buyer’s plans. Some may want to maintain the brand. Others may rebrand or change business operations entirely.
Buyers will likely conduct due diligence and the seller must comply with related disclosures and legal obligations.
This type of business sale suits SME business owners who lack the expertise or time to sell on their own.
Online business marketplaces
If you want to sell your business via online marketplaces, then this method can suit you best. You have to list your business on a platform that connects buyers and sellers.
Such platforms allow you to advertise your business and manage the sale process easily. You can decide who to engage with, when to share detailed financial information, and when to accept an offer.
If you do not have access to large brokerage firms, then this method is ideal for you. Online business marketplaces match you with multiple interested buyers.
Hence, make sure the sale contract covers all terms, including assets, liabilities, and warranties.
Auctions
Selling a business through auctions means putting your business up for sale at a bidding event. Interested buyers will place bids, and your business will be sold to the highest bidder.
You can set reserve prices, terms of sale, and approval for final offers. It’s important to keep in mind that some or all parts of your business can shut down after the sale.
Hence, this type of business sale is the ideal option for companies with valuable assets. It suits businesses facing financial difficulties, and owners looking to maximise sale price.
How to Find the Right Buyer for Your Business?
About 75% of business owners deeply regret selling their business one year after the deal. One primary reason is selling their business to the wrong buyer.
Selling your business is a tough choice, but it should be worth it.
If you want to find the right buyer, the first step is to define who they are.
Define your ideal buyer
The right buyer is, simply, the one whose interests align with yours. It depends on your goal for the business after the sale.
For example, if you want business growth, look for strategic buyers who are financially strong and experienced. If you want to shut it down, find those who are interested in liquidating assets.
To determine the right buyer for your business, consider the following aspects:
- Interest in your product or service
- Financial capability to meet your requirements
- Experience in a similar field
- Not too confrontational
- Background as your competitor, a supplier, investor, or a friend
- Buying history
Approach corporate finance houses and investment firms
You might want to approach finance houses or investment firms that want to sell your business. Make sure to keep all your sale terms and requirements ready to share with these firms. However, note that it may take some time to get noticed.
These types of firms generally look for business with steady revenues, solid market position, and a capable leadership team.
Hence, it is beneficial to make your business more appealing for acquisition.
Look within your business
Yes, you can find your ideal buyer right within your company!
There might be a potential buyer among your employees or management who is invested in your business. Such types of business sales are called MEBO (Management and Employee Buyout).
In fact, in the U.K, employee buyouts are 8% to 12% more productive per employee.
This is because employees work under familiar leadership, leading to higher engagement and satisfaction. However, the process of finalising this kind of sale requires careful planning, legal advice, and enough funding.
Use your network
It’s a smart move to tap into your existing networks. Think about the relationships you’ve built over the years with competitors, suppliers, financial advisors, and other professionals.
Make use of these connections to find the right buyer. They help refine your sales approach with their connections who are beyond your network.
Encourage these professionals to use their contacts to open up doors to a wider pool of buyers. They might know someone who’s looking to purchase a business like yours or even have insights to improve your sales strategy.
This will, thus, expand your reach and increase the chances of finding the perfect buyer for your business.
Explore the internet
The internet is a great resource to research buyers. For starters, any serious buyer will likely have a polished website and a strong online presence. Remember, your search for the right buyer will be an ongoing process.
You can also create listings for your business, where interested buyers contact you. Just keep in mind that many of these listing sites charge a registration fee.
As your business evolves, these buyers can move in and out of your criteria over time. Hence, keep your buyer lists updated.
Online resources increase your chances of a successful sale, but it’s important to weigh the costs as well.
How Long Does it Take to Sell a Business?
On average, it can take six to twelve months to sell your business. Most mid-sized companies are easier to sell when compared to smaller businesses.
This is influenced by factors like revenue, business field, location, cash flow, and the asking price. Another overlooked factor is the business’s position in the market. It can be down to good timing which can lead to a faster sale.
However, it’s usually not possible to accelerate the selling process.
What is the Legal Process for Selling a Business?
Neglecting important legal aspects can limit or even diminish the selling price of you
business. While every business is unique from a legal perspective, there are general legal steps that can be applicable to most business sales
Preparation and valuation
Here, you have to get your business ready for the sale. Determine your business’s market value using asset-based, market-based, or income-based methods.
Your buyer’s solicitor will conduct due diligence. They will check the value of your business, physical assets, and business accounts.
Reports from legal consultants and accountants are prepared to record the findings during this process. It is also supported by warranties and indemnities in the agreement. Keep ready the financial statements, tax filings, and partnership agreements.
Confidentiality agreement
Confidentiality laws are governed by the common law of confidentiality. While these are not statutorily required, you can abide by them to protect sensitive business information.
As per the law, you must not disclose confidential information without the presence of legal authority or justification.
Heads of terms
Draft the heads of terms document to provide terms of the sale, such as price and timeline. It helps you be clear about your expectations for further negotiations.
This is not meant to be legally binding, so either party is free to opt out or negotiate. It’s always a good idea to speak to a solicitor about heads of terms before you agree to them.
It includes details of:
- Parties involved in the sale, along with their solicitors
- Sale price
- Assets being sold, or excluded
- Employees
- Stock
- Lease
- Other particular aspects
Due diligence
This is the actual process where the buyer will review all the aspects of your business. The seller is legally required to disclose relevant information so that there are no hidden issues.
Once this process is completed, the buyer will make a decision about the purchase.
Sale and purchase agreement
This agreement legally binds the parties. It includes terms of sale, indemnities, warranties, and other conditions. It formalises the sale and makes sure all the parties are aware of their duties after the sale.
It protects both the parties through Contract Law and Misrepresentation Act 1967.
Third-party consents
If your business has contracts with landlords, partners, or suppliers, their consent is needed to transfer their agreements to the new owner. You can contact them and get formal approval.
Without third-party consents, the buyer cannot legally take over existing business contracts. This can cause delays or even prevent the sale.
Employee transfer (TUPE)
This law (TUPE) protects the employees when your business is transferred to a new owner. It ensures their rights, contracts, and benefits.
This is an important step as it helps you avoid legal disputes with employees after the sale.
Completion of the sale
This is the step where the sale is legally completed and ownership of the business is transferred.
Once both parties agree on the final terms, you can initiate the Sale and Purchase Agreement (SPA) to close the deal. However, ensure to consult with legal professionals to determine the fairness of the SPA.
Post-sale
After the sale, you will need to handle taxes and comply with any after-sale agreements you have made. If you make a profit, you may need to pay CGT (Capital Gains Tax).
If part of the sale, you might be prevented from competing with the buyer for a certain period.
What Types of Tax Have to Be Paid When You Sell a Business?
You must understand your tax obligations as they will impact the profit you make and your tax position for future sales. Working with a reputable business transfer agent or broker helps clarify tax implications.
Below are the types of tax which will help you maximise the deal’s financial outcomes:
1. Capital Gains Tax (CGT)
This is the tax on the profit made from selling a business, not the total sale amount. It’s calculated on the difference between the purchase price and the selling price. You may be eligible for Business Asset Disposal Relief (BADR), which reduces the overall CGT rate to 10% for those eligible.
2. Business Asset Disposal Relief (BADR)
BADR was previously known as Entrepreneurs’ Relief. It reduces CGT to 10% on the first £1 million for qualifying gains. To be eligible, you must have owned the business for a minimum of two years before selling.
3. Corporation tax
If the business is sold as an asset sale, the profits made will be subject to corporation tax. The current corporate tax on chargeable gains is around 19%.
4. Income tax
When the sale involves earn-outs (future payments based on the business’s performance after the sale), you will be taxed on this income.
5. Value-Added Tax (VAT)
The sale contracts that involve selling specific business assets require you to pay VAT. However, this type of tax does not apply when the business is sold as a going concern.
6. National Insurance Contributions (NICs)
If you are a sole trader or in a partnership, you may have to pay Class 2 and Class 4 National Insurance contributions. This will be based on the profits made from the business.
7. Stamp duty
When selling the shares of the company, the buyer is liable to pay stamp duty on purchase of the shares. Also, when the sale involves the transfer of a property or land, Stamp Duty Land Tax (SDLT) applies for the buyer.
FAQs
How much does it cost to sell a business?
Selling a business can cost between 1% to 10% of the sale price. The average broker fee also falls within this range. If the business brokers provide valuable expertise, their fees can be higher. Legal fees from a solicitor are also usually around 1% of the sale price. The overall percentage may change depending on the business size, industry, and chosen services.
How long should I expect to be involved post-sale?
Business owners can expect to be involved in the post-sale process for around 6-8 weeks. It involves the handover process, providing documents, and being available to answer any buyer’s questions. Thorough checks on the property can take several weeks and additional information from the seller.
What documents are required to sell a business?
The documents needed to sell a business include: Business Sale Agreement, Confidentiality Agreements, company registration documents, Heads of Agreement, relevant licences, disclosure letter, and financial statements. During this legal process, the solicitors are usually present to manage everything effectively.
What are the key terms to include in a sales agreement?
The key terms to include in a sales agreement are payment terms, warranties, purchase price, assets and liabilities, and solvency. It is also common to include non-compete and non-solicitation clauses. It’s also beneficial to have terms outlining dispute resolutions and governing law.