How to sell a business

Last updated: November 2024 | 4 min read

About 50,000 UK businesses are sold annually.

This guide shows you the key steps of selling your small business, from valuation to completion.

 

Why do business owners decide to sell?

Business owners sell for various reasons: retirement, lifestyle changes, market conditions, health issues, and new opportunities. As a business owner, you should carefully consider your motivations for selling.

As examples:

As you approach your mid-fifties, you might consider selling for early retirement - especially if a competitor's recent transaction has prompted you to reassess.

Health concerns could lead you to reconsider your company commitments. You might want to sell your business in order to have more free time to relax or spend with family.

Sometimes, the prospect of a new business venture seems too appealing to ignore.

How to determine the optimal time to sell your enterprise

Market conditions, industry trends, financial performance, and personal readiness influence the timing of a company sale. These factors combine to create a favourable selling period.

Enterprises sold during peak performance often command higher prices. Economic cycles and industry-specific trends can affect timing - a thriving economy might increase buyer interest, while a sector downturn could necessitate postponing the transaction.

What steps should you take to prepare your company for sale?

Preparing to sell well in advance helps small business owners reach their desired outcomes. Preparation can take up to two years for optimal results. This time allows you to improve operations, increase profitability, and collect all necessary documentation.

Preparing your business for sale includes a comprehensive review of financial documentation, operational improvement, legal compliance, and value increase. This process shows areas for enhancement and potential red flags that could put off buyers or change valuation.

For small companies, this might involve settling outstanding debts, upgrading equipment, or formalising informal processes. Writing or revising your operating manual and procedures can be a valuable part of this preparation.

How can you increase your enterprise's value before selling?

You increase your business worth by improving operations, expanding the customer base, enhancing financial performance, and protecting intellectual property.

Specific actions involve settling ongoing legal issues, upgrading technology systems, and improving your brand's online presence.

For example, a small manufacturing business could buy modern machinery to increase production capacity and efficiency, thereby boosting its market value.

What financial documents are necessary for a company sale?

Necessary financial documents include profit and loss statements, balance sheets, cash flow statements, tax returns, and financial projections.

Ensure your financial statements are up-to-date and accurate before beginning the transaction process.

For small enterprises, these might also include detailed records of inventory, equipment values, and outstanding loans or debts. Having these documents audited or reviewed by a professional accountant reassures potential buyers and speeds up the due diligence process.

Buyers expect to see three to five years of historical financial data. Arrange this information chronologically and ensure it's easily accessible. Consider setting up a digital data room where potential buyers can securely access these documents.

How should you manage employee concerns during a company sale?

Help staff feel less worried and keep them motivated through clear communication, retention incentives, and involvement in the transition.

In small enterprises, where employees often have close relationships with the owner, open and honest communication is even more important than in larger businesses. Specific strategies for communication include regular updates and Q&A sessions.

Retention incentives, such as bonuses or equity stakes, encourage key employees to stay through the transition and work with the new owner. Keeping the management team intact can be crucial for a smooth transition.

Manage transparency with confidentiality. Give information on a need-to-know basis, and consider asking key employees to sign non-disclosure agreements. This can also be used with potential buyers to protect sensitive business information during negotiations. Tell staff about their job security where possible, but don't make promises you can't guarantee.

What methods are used to value a business?

Business valuation combines objective financial data with subjective factors such as market conditions and growth potential. Professional valuations provide a realistic starting point for negotiations.

What are the three main business valuation approaches?

Asset-based, earnings-based, and market-based methods are the most common valuation approaches. The asset-based approach calculates the value of all business assets minus liabilities. The earnings-based method examines the company's ability to generate profit, often using multiples of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation). The market-based approach compares the enterprise to similar companies that have recently sold.

Each method suits different types of businesses or industries. For example, asset-based approaches may be appropriate for property-rich enterprises, while earnings-based methods suit service-based companies with strong cash flows.

What factors affect a business's value?

Financial performance, market position, customer base, intellectual property, and growth potential are key factors that can increase or decrease an enterprise's worth. Strong financial performance, including consistent revenue growth and profitability, positively influences value.

Intangible assets, such as brand reputation or proprietary technology or customer data, can increase a company's worth considerably. However, they can be difficult to value.

What strategies can you use to find potential buyers?

Identify potential buyers through networking, online platforms, business sale brokers, and approaching competitors or suppliers. Networking within your industry allows you to use existing relationships and market knowledge. Online business-for-sale platforms provide wide exposure to interested parties. These websites can help you connect with numerous interested buyers quickly. Brokers provide expertise and connections. Approaching competitors or suppliers can reveal strategic buyers with industry insights. Another option to consider is a management buy out, where the existing management team purchases the enterprise.

Create a compelling business profile or sales memorandum highlighting your company's strengths and potential, which will help attract the right buyer for your enterprise. Maintain confidentiality during this process to protect your business value, relationships with employees, customers, and suppliers.

How can business brokers and advisors assist in the sale process?

Business brokers and advisors facilitate the transaction process by offering valuation, marketing, buyer screening, negotiation support, and deal management services. A business broker can be particularly helpful for small business owners who lack experience in selling companies. They can help find qualified buyers and managing the sale. When selecting a broker, consider their industry experience, track record, and fee structure. A skilled broker maintains confidentiality, manages the emotional aspects of the sale, and guides through complex negotiations.

Brokers typically charge a percentage of the sale price, often between 5% and 10% for small businesses. While this fee may appear substantial, their expertise can often result in a higher sale value that offsets their cost.

Some brokers offer tiered fee structures or success-based fees to align their interests with yours.

What are effective negotiation strategies for selling a business?

Effective business sale negotiations depend on understanding your minimum acceptable price, readiness to exit discussions, aiming for mutually beneficial agreements, and an objective approach. The transaction structure - asset vs share sale - significantly affects both parties. Earn-out structures can close valuation gaps by tying part of the purchase price to future performance.

Consider hiring a skilled negotiator or advisor for complex discussions. They keep objectivity and handle intricate aspects. Small enterprise owners often benefit from professional help when dealing with larger corporate buyers or when the sale involves complicated intellectual property rights.

Selling a company includes several legal aspects: the business purchase agreement, due diligence process, warranties and indemnities, and handling of intellectual property.

The business purchase agreement (or business sale agreement, if you're selling) outlines the price, payment terms, and conditions of sale, including specific transaction terms. Warranties and indemnities protect both parties by allocating risk and providing assurances about the enterprise's condition.

You can structure your deal in various ways. Asset sales involve selling specific business assets, while share sales can transfer ownership of the entire company.

Engaging a solicitor experienced in business sales before starting negotiations with potential buyers ensures you're well-prepared for the legal complexities ahead and can protect your interests throughout the transaction process. However, for many smaller businesses, the cost of professional help is usually a significant proportion of the asking price.

You can also use a business sale agreement template to become aware of potential issues you might need to consider, and as a checklist for what basic terms you need to agree on.

What are the tax implications of selling a business in the UK?

Selling a business in the UK results in Capital Gains Tax (CGT) on the profit from your transaction, meaning you must pay CGT on the proceeds.

VAT might also apply, depending on your company structure and assets.

CGT is calculated on the difference between your sale price and the original cost of your assets. Current rates are 10% for basic rate taxpayers and 20% for higher rate taxpayers. Business Asset Disposal Relief (BADR) - formerly Entrepreneurs' Relief - reduces your CGT rate to 10% on qualifying disposals up to £1 million. The rate will change to 14% in April 2025 and 18% in 2026.

For example, if you sell your small manufacturing firm for £1.5 million in December 2024, having originally invested £500,000, you could save up to £100,000 in tax through BADR.

Tax planning before the sale allows you to examine available tax reliefs and potentially reduce your tax liability, as various tax reliefs may apply to your situation. Structuring your transaction correctly can minimise your overall tax liability. Seek professional advice well before you begin the sales process. A tax expert can guide you through complex reliefs and ensure you maximise potential savings.

How can you manage the emotional aspects of selling your business?

When selling your company, you might experience psychological challenges such as loss of identity, fear of the unknown, and concerns about legacy. Address these by focusing on future goals and acknowledging past achievements. Prepare for life after the transaction by initiating new interests or pursuits.

Maintaining some connection to the enterprise - perhaps through a consulting role or mentorship - can ease the transition and preserve the company's legacy.

Seek support from family, friends, or professional counsellors during this emotional process. Small business owners can use resources like the Federation of Small Businesses, which provides guidance and networking opportunities for those undergoing the sale of their company.

What should you consider after selling your business?

After selling your enterprise, focus on financial planning for early retirement and address tax liabilities. Invest sale proceeds wisely. Collaborate with financial advisors to develop a comprehensive plan that ensures long-term financial security and aligns with personal goals.

Allow time to adjust to new circumstances. Avoid rushing into major financial decisions immediately after the transaction. This transition period enables you to reassess your financial priorities and explore new investment opportunities without pressure, allowing you to make more informed choices about your newfound wealth.

How do you notify HMRC of your business sale?

Inform HMRC when you sell your enterprise by updating your tax records, submitting final tax returns, and reporting the transaction for capital gains tax purposes. You have 30 days from the sale completion to report and pay any CGT due.

For limited companies, submit a final corporation tax return. If you're operating as a limited company, you might need to follow specific procedures for closing down the business entity if you're selling assets. Sole traders must submit a final self assessment form. Complete form P45 for any employees and provide their final PAYE information to HMRC. Specific forms and timing vary based on your company structure - limited companies, partnerships, and sole traders have different requirements, with a sole trader having simpler reporting obligations.

A tax professional can help ensure you meet all obligations and investigate available reliefs or exemptions. They can be particularly valuable for complex sales or if you're uncertain about the tax implications of your business disposal.

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