Ever considered selling your business? Or wonder why one might do so? This resource helps to outline reasons why someone would sell their business alongside identifying what’s needed to do to be able to sell a business.
To begin with, let’s think about reasons why one would sell their business. There can be plenty of reasons why a business is sold; it could be that the owner is preparing for retirement or an attractive offer of employment has been made. Other factors could be partnership feuds, bankruptcy etc.
As a heads up, selling a business can be a complex and lengthy process and it is vital to seek professional advice and support in order to achieve the best result. If you need to seek professional advice we have a team of business advisors at the ready to help, reach out here!
After assessing why one might sell their business, the next step is to plan the sale of the business.
The plan of the sale
Behind each decision to sell a business is a different motive. So, the planning of the sale differs for each business and the business owner’s needs. For instance, if someone is selling their business which they grew themselves from scratch it can be an emotional experience to sell and the planning for such change can be difficult.
Keeping this in mind, it is essential that any decisions taken are rational and objective.
Another situation that might put one to need to sell is retirement, retirement will then require the sale of the business to be at its maximum price. A better sale equals a better pension.
Issues that should be considered during the planning are:
- Consider whether the intention is to sell the business outright or retain a minority stake. Further, do any directors or shareholders want to retain involvement in the business in a managerial role?
- How will the sale affect staff or other stakeholders? How will morale be maintained?
Linking back to before about seeking professional advice. There are different professional advisors that will help secure the best price for a business, minimise any tax liabilities, smooth out negotiations and comply with relevant laws.
A professional advisor will also have an objective opinion and is unaffected by any emotional attachment.
If you are considering selling your business the following are who you will need to engage with to achieve the best possible outcome;
A business broker will help you to plan the sale, and value accurately, find potential buyers and achieve the best price.
Commercial property agent specialising in sales, letting and acquisition of leasehold and freehold commercial property.
A financial advisor; a corporate financial adviser will help you to consider their option whilst guiding you through the process.
Solicitor will help to draft and negotiate legal documents whilst ensuring you stay within the law. If the sale of a business includes a property, it’s good to use a law firm that has experience in business conveyancing.
An accountant aims to deal with taxation issues and can produce relevant financial statements and reports for the prospective buyer. Alos will organise the final payment once the deal is complete.
A chartered surveyor ensures that the value of various assets is fully reflected in the asking price. If the case is a forced sale, an accurate valuation of all assets is essential because other factors like goodwill can be hard to value.
Lastly, an EMS Business advisor. We provided consultancy services to help function a plan and connect you with the important roles needed to process a sale.
The legal status
The legal status of the business that is being sold is important as it rounds up who exactly owns various assets of the business.
Sole traders are the one who owns all assets of the business and makes the decision on how assets are sold. Like sole traders, partners own their share of the business and any sale must be agreed upon according to the provisions of the partnership agreement.
In both of these cases, it is not the business that is essentially sold but rather the fixed assets attached to the business: equipment and property etc. Intangible assets as well are sold this is the business name, intellectual property and goodwill and stock sold.
Taxation issues commonly arise from a sale of a business that is owned by a sole trader or partnership.
The revenue generated from the sale of the business is then classified as income so the seller’s income tax status is to change when the business is sold. Inform HM Revenue and Customs of any change.
Capital gains tax may be due to the disposal of the assets. But, the seller can be entitled to relief on gains under the Entrepreneurs’ Relief scheme.
VAT might be payable on part of the transaction. This depends on the business being sold but there may be implications for the inheritance tax.
Oh, and stamp duty may be applicable for the buyer to pay. Overall, any of these tax payments can be critical and it’s vital that you seek professional advice in advance of a potential sale.
In different circumstances, a business that operates as a limited company or as a limited liability partnership (LLP) has a separate legal entity from the owner/owners.
With this in mind, they’re two options for a limited company. One is the business is sold in its entirety by selling the shares within it. In this case, buyers can be wary of taking on hidden liabilities in a business. So the other option may be to only purchase the assets and goodwill of the business.
LLPs don’t have shares to sell instead members of an LLP can sell their interest in its assets and goodwill.
Time to prepare
If you are aiming for the best possible price, it’s a good idea to start preparing a year in advance. Ways to do this is to consider the following;
You want to start considering your credibility, make sure customers pay on time and you demonstrate a positive cash flow etc. This can be done by setting up specific processes to ensure everything is on time.
It’s time to look at expenditure, is it possible to reduce, as far as possible? This concludes travel or entertainment and expensive cars.
Potential buyers will have an eye for consistent expenditure patterns across the business and take time to look at all essential expenditures. Is there a way you can reduce this without cutting back on vital areas?
Maintain the assets of the business well. Keep the property well kept. Also if your business operates from a leasehold property, review the arrangements for tenure and rent review and check the terms of your lease to ensure that it can be assigned (a third party can take over).
Along with keeping the property well kept, make sure machinery and equipment are in good condition, it’s also ideal if ongoing maintenance contracts are in place.
Don’t leave team members in the dust, many businesses thrive from the skills and experience of employees. Keep members informed to minimise disruption.
A buyer will be interested in continuity of supply. Think about where the loyalty of key customers and suppliers can be secured by long-term contracts? Also if a business operates under a licence, it should be ensured that the license is transferable.
The sales memorandum
In simple terms, a sales memorandum is a brief summary and profile of the business. Why is it important when thinking about selling? It enables potential buyers to decide whether enough interest is there to take further action.
Commercially sensitive information should be excluded while any positives could be highlighted. Misleading information should be avoided.
In the memorandum, you should include:
- Business overview
- Reasons for sale
- Management and employees
- Financial summary
It is normal to send a disclaimer along with the memorandum and any other further business details, stating that the sellers do not guarantee the information given. In total, it’s important to be clear about what is being sold and present it in a way that is clear for serious buyers.
Looking for a buyer
If possible it’s good to get listed on these online directories of businesses for sale such as:
Don’t forget discretion is important in order to maintain customer and employee confidence.
Again, professionals can help here, a business broker or a commercial property agent will be ideal here.
With any negotiation, make sure to set objectives for the sale.
The valuation of the business is the basis for setting up objectives. You should include an upper limit from where negotiations may start and a lower limit, which usually depends on how quickly the owner needs to sell.
Along with setting objectives ahead of terms agreement documents should be drafted. This isn’t a final contract but gives a good idea of what commitment is needed for the sale for both parties.
To learn more about the valuation of the business and an understanding of the heads of terms agreement, read Want to Buy a Business? Here’s What You Need to Know
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