There are some junctures in life that are bigger than others, and parting ways with your business can be up there with the best. Selling your business is a big milestone and hopefully a rewarding one too. A sale could be paving the way to a new business venture perhaps or to a well-earned and happy retirement.
Once you’ve made the decision to sell your business and are ready to begin the process, there are quite a few steps worth being aware of to help make sure it all goes well. The process is basically the same whether you’re a small company, startup, sole trader, or if you’ve been in business for decades.
Although some sale transactions can get complicated, selling a business doesn’t always have to be complex. In this article, we’ve outlined the steps required for a simple sale.
Selling a business
Deciding to sell your business is a big milestone. It may be the reward for years of hard work and a precursor to a well-earned retirement.
Whatever your reason for selling, there are a number of steps you’ll need to take and some issues you might need to be aware of before going ahead selling a business.
We hope this article goes some way in assisting you to make the right decisions for you and your business.
When to Sell a Business
The decision to sell is usually driven by a number of different factors which often include your personal circumstances as a business owner as well as the state of the business itself.
There may be other reasons too. Below we’ve listed some common scenarios which often help tip the balance in favour of a sale.
You might want to cash out on your investment and use the money to retire or set up your next idea. Or perhaps the business needs new investment to take it to the next level and a new owner will be better placed to provide this.
You may have business partners and fellow shareholders who originally invested in the expectation of an exit and a sale will allow them to realise their investment.
Another company in the same sector as yours may want to expand its business by buying your company, perhaps to acquire technology or know-how or to increase its profitability through economies of scale and cost savings.
Changes to the external business environment in which your business operates, such as legal or regulatory changes like those resulting from the UK’s withdrawal from the EU may also accelerate your decision to sell your business.
How do you price a Business to Sell?
Every business is unique, and your business will be no exception, the value of it will depend on many factors.
These will be factors relating specifically to your business, including its profitability, market share, reputation, track record and intellectual property.
In addition, external factors may also impact value, including the conditions, trends and opportunities of the market in which your business operates and general economic conditions.
Sometimes, a potential buyer may make an unprompted approach to you with an offer for your business, based on their own assessment of its value and market opportunities.
Or you may fortunate, courting more than one potential buyer. Rather like a house sale, you’re likely to achieve a higher price for your business as you do for your home, when there is competition for the acquisition between potential buyers.
Achieving a good sale price isn’t all down to luck and a fair wind. There are a number of standardised ways to value your business. One or more of these may be applicable to your business, often depending on the sector in which your business operates. More than one valuation approach can be applied to help compare and verify the valuation based on more than one valuation methodology.
Some examples of valuation methodologies include in our selling a business blog series:
- Multiple of earnings – a value based on a multiple of the historic or average profits/earnings or revenue of your business. The multiple applied will be industry-specific and will be determined by consulting available market data, the valuations of comparable businesses, and publicly announced sales or other transactions.
- Discounted cash flow – applicable to profitable or cash-generative businesses. The value is based on the projected amount of cash that a business will generate in the future, discounted by a rate to reflect the present value of that cash flow.
- Asset value – a valuation based on the present value of the assets of a business. This method is usually used for businesses with predominantly tangible assets such as real estate, or a fleet of vehicles.
- Recent transactions – a valuation based on an analysis of publicly-announced transactions for businesses operating in the same sector.
To make sure you’re obtaining a market price for your business, you should engage your accountants, a corporate finance adviser or another suitable business professional who is experienced in valuing businesses in the same sector as yours.
How to Sell a Business
On a positive note, it’s possible to sell almost any business if you’re fully prepared and the business has been structured and managed properly. With these basics under your belt, the next step is to identify potential buyers.
Buyers can often be found from your own network, you may know potential buyers for your business who you can approach directly yourself.
Often, businesses appoint a corporate finance or other professional advisor to solicit interest and offers from potential buyers for your business. They may advise you to carry out an auction process, under which initial offers are invited from multiple potential bidders and, assuming more than one initial offer is received, a competitive sale process is carried out with two or more of them to achieve the best possible price and sale terms.
Business Sale Structures – Selling a business
Assuming you run your business as a limited company, there are a couple of ways to structure a sale:
- Share sale: the sale by the shareholders of the shares in the company
- Asset sale: the sale by the company of its business and assets
Whether a sale is structured as a share sale or an asset sale will depend on (you’ve guessed it), a number of factors.
That being said, as a general rule, a seller will prefer to sell shares as opposed to the sale of the underlying business and assets of a company.
There are a few good reasons for this, the main ones being:
- Tax: a share sale will usually result in a better overall tax position for a seller, including (for an individual) the possible availability of business asset disposal relief (previously called entrepreneurs relief.)
- Sale structure: a share sale may avoid the need to obtain applicable third-party consents for the sale of specific assets such as property and contracts.
- Ease of sale process: the sale of shares results in the sale of the entire company to the buyer. An asset sale means that the seller remains the owner of the transferring company.
The buyer, on the other hand, may wish to purchase the underlying business and assets of a company rather than the company itself. The main reasons for this include:
- Acquired assets: the buyer can pick and choose the assets which it acquires and leave behind with the selling company the assets which the buyer does not want.
- Liabilities: the buyer of a company will acquire the company with all of its actual and contingent liabilities, for example for past breach of contract, unpaid taxes or non-compliance with legal requirements. Under an asset sale, the buyer can limit the liabilities of the business which the buyer assumes responsibility for.
- Due diligence: the buyer may choose to do less due diligence for an asset purchase than it would need to do for a share purchase.
Ultimately, the structure of the sale is determined by various influence and some common examples include:
- the relative negotiating strengths of the seller and buyer
- the nature of the business
- contingent liabilities or other issues which come to light during the buyer’s due diligence investigation
- whether one or more third-party consents might be avoided depending on the structure chosen
- tax implications for all parties
Share Sales – Selling a business
A share sale is often the simplest method for you to sell your business. When you sell your shares in your company, the new owner takes over ownership of the company with all of its assets and liabilities.
The business can carry on as usual immediately after the sale, with no impact on dealings with employees, suppliers, or customers.
A share sale does not mean the end of any potential liability for a seller. The buyer will usually require contractual warranties from a seller regarding the company, its business, financial results, assets, and liabilities. The buyer may also require an indemnity for –pre-completion tax liabilities of the company and for specific problems that are identified by the buyer during the transaction process. You will remain liable after the sale for legal claims which the buyer may have against you under these warranties and indemnities.
If you own a majority of your company but have one or more minority shareholders, hopefully you have drag-along rights in your company’s shareholders agreement and articles of association. These rights mean that you can require your fellow shareholders to sell their shares in the company at the same time as you sell. If not, you will need to get them to agree to sell, which could be tricky if they are not happy with the sale.
Our template documents for business set-up, including drag-along rights just for this eventuality.
Asset Sales
When selling a business, the asset sale documents will identify which of the company’s property and assets are being sold and which are being retained.
The main categories of asset which are typically sold include:
- goodwill and business name
- business premises (which might be owned or leased)
- physical assets, machinery and equipment
- stock
- rights under contracts, including with suppliers and customers
- intellectual property rights
- business records
Cash and book debts (amounts owed by creditors of the business) are usually not sold.
Depending on the assets being sold, third party consent might be required, including:
- landlord’s consent to the assignment of leasehold property
- consent from a supplier or customer to the assignment of its contract to the buyer
Choosing when to approach third parties for consent will impact timing and may result in the deal losing its confidential status. On an asset sale, employees engaged in the business will transfer automatically to the buyer under legal regulations known as TUPE.
With an asset sale, the due diligence and sale process can be much quicker. However, the immediate actions post-sale may require significant engagement and work with customers and suppliers of the business to make sure that they continue to trade with the business.
Non-Disclosure Agreement
We’d recommend you get your buyer to sign up to an NDA early in the sale process when considering selling a business. You will inevitably have to provide any potential buyers with confidential information about your business.
An NDA is essential to protect the confidentiality of this information if for any reason the sale does not proceed.
An NDA can also apply to the sale itself, so customers, suppliers and the market generally do not become aware that you are in discussions for a sale.
Heads Of Terms
Before detailed legal documents are drafted and before the buyer begins their due diligence, both parties in a transaction will want to agree on the basic structure and main terms of their deal. They do this by discussing and signing Heads of Terms, often also called an MOU or letter of intent. Heads of Terms are invariably not legally-binding on the parties, except for clauses dealing with:
- confidentiality
- exclusivity, under which the seller may agree not to sell (or to negotiate a possible sale) to another buyer for a specified period
Sale and Purchase Agreement
If you’re conducting a share sale, the main document will be a Share Purchase Agreement (SPA).
If it’s an asset sale, the main document will be a Business Purchase Agreement (BPA) or Asset Purchase Agreement (APA).
This document will likely require a considerable amount of time to prepare, review, discuss and negotiate before it is in a final agreed form.
This document will likely require a considerable amount of time to prepare, review, discuss and negotiate before it is in a final agreed form.
Common features of these documents include:
- payment of the purchase price to the seller including possible earnout consideration (this is additional consideration paid following the sale and calculated by reference to the performance of the business following the sale).
- warranties from the seller in favour of the buyer.
- agreed contractual limitations on the potential liability of the seller under the warranties.
- indemnities from the seller in relation to pre-completion tax matters (if a sale of shares) and for matters identified during the buyer’s due diligence.
- restrictive covenants from the seller, agreeing not to compete with the business or solicit employees, customers or suppliers of the business for a specified period following the sale.
Other Questions you may be considering when selling a business
Can I Sell a Business without a Solicitor?
You aren’t legally required to use one, but unless you are an experienced seller, then you would be best advised to engage a solicitor for the sale.
The transaction documents, in particular the main purchase agreement, will usually be prepared by the buyer. Your lawyer will advise you on its terms, where it can be negotiated and what it means in terms of future potential liability for you.
Our template documents for the sale of shares in a company or the sale of a business can help both parties to a transaction.
For buyers and their lawyers, our template documents cover the entire transaction process and can be used as the basis of the documents that are presented to the seller.
For sellers and their lawyers, our template documents will assist in preparing for the sale, reviewing and negotiating documents produced by the buyer’s team and working towards completion of a successful transaction.
For buyers and their lawyers, our template documents cover the entire transaction process and can be used as the basis of the documents that are presented to the seller.
For sellers and their lawyers, our template documents will assist in preparing for the sale, reviewing and negotiating documents produced by the buyer’s team and working towards completion of a successful transaction.
How long can it take to Sell a Business?
There is no fixed or simple answer to this question as there are many variables when selling a business.
The scope and duration of the buyer’s due diligence will depend on the nature of the business and its complexity. The negotiation of the sale documents will depend on the approach of the parties and whether negotiations become protracted.
Generally speaking, the sale of a private limited company or selling a business will take around 2-3 months from the time that a buyer has been identified.
Can I Sell a Business if the Business is in debt?
Yes, you can sell a loss-making business. If the business is insolvent it may be bought as part of a formal administration process.
This will of course affect the amount which potential buyers may be willing to pay given the uncertainty of future trading and how much investment may be required to achieve profitability.
Can I sell a Minority Shareholding?
If you hold a minority of the shares in a company, whether you can sell them to a third-party purchaser or not will depend on the company’s shareholders agreement and Articles of Association.
When selling a business, this may be permitted but subject first to the other shareholders having pre-emption rights (rights of first refusal to match the price payable by a buyer) before you can sell to a buyer.
Buying or Selling a Business with Paper Rock Template Documents
Our range of template documents relating to the sale of companies and businesses should help you as a seller to prepare selling a business, for the sale, negotiate terms with the buyer and achieve a successful transaction.
Each document is accompanied by a guidance note which explains its purpose and how it should be completed and used.
