Director rights and responsibilities when selling a business
Selling your business can be exciting and daunting in equal measures. It typically represents the culmination of years of hard work, so it pays to find out as much as possible about the process.
This helps you to understand the principle issues when selling a business in the UK, including the different types of sale and the tax implications of each, but also the nuances of various stages.
Selling a business is a complex procedure, so here are some tips and pointers to help you achieve your objectives and make the highest return possible on your original investment. One of the first issues you’ll need to consider is when to place the business for sale.
So is there a right time to sell a business?
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When is the best time to sell your business?
Common reasons for selling a business include retirement and ill health, but equally, moving to a new venture may figure in your plans. Unfortunately, if ill health is an issue you may not have the luxury of choice, but if you are able to time the sale well it can make a positive difference to the final value.
Selling a business during a growth stage, for example, is likely to attract significant interest from investors looking to capitalise on rising profits and performance. Other elements may also influence the timing, however.
- New competition may be disrupting the market, making you feel the threat to your business is too great
- You might be looking towards a new venture – perhaps you’ve run the business for some time, feel you’ve achieved your main objectives, and are seeking a fresh challenge
- Perhaps a drop in profits has driven your decision to sell– if there’s been a drop in the market in general, maybe you need to sell the business before profits fall further
- Is a trade sale or pre-pack appropriate for me?
Whether personal circumstances or the financial state of your business is motivating you to sell, however, careful planning and preparation are key to achieving the highest final value.
So how do you get your business sale-ready?
Getting your business ready for sale
Apart from planning the business sale well in advance, these are a few areas to consider when preparing your business for sale:
Presenting organised books, accounts, and up-to-date tax affairs, will reassure prospective buyers. Conversely, anomalies or omissions in your financial statements will naturally create suspicion and may deter genuine buyers from making an investment.
Cutting non-essential outgoings allows you to present a streamlined business for sale – one that’s market-ready. The same applies to watertight employment and supplier contracts, with no pending or ongoing disputes or litigation.
Protecting business assets
It’s easy to overlook the value of intellectual property (IP) in a business sale, but this is an asset that’s often fundamental to a business’ success. So make sure your IP is legally protected by patents and trademarks where appropriate.
Even if your input to the business has been crucial in the past, you now want to make sure your enterprise runs smoothly without you. You can achieve this by automating and systemising, producing staff manuals and documentation for the new owner, and developing a robust management team.
Deciding on the type of sale
Do you want to sell your entire business or only the assets? It’s important to understand the tax implications, risks, and advantages/disadvantages of each type of sale, and professional advice is crucial in this respect.
An independent professional valuation is key when selling your business, and there are three standard approaches:
This involves using business income as a basis for valuation. The business’ current income is projected and the figure adjusted to account for changes in elements such as taxation and performance/growth, arriving at an estimate of future earnings or future cash flows.
An asset-based valuation involves calculating net assets, which are then depreciated to arrive at a value for your business. This method doesn’t take into account the business’ earning potential, and may be used if your business is in decline.
The recent sales value of other businesses comparable to yours is used in the market value approach. Criteria such as earnings are compared with the final selling price these businesses have achieved, with adjustments made for any differences in size and location, for example.
Intangible assets, including goodwill and reputation, and factors such as the business’ location and customer base, also influence value. The ease with which a new owner can take over and continue to make profits is also an important element.
Buyer due diligence
Once initial negotiations have taken place with a buyer, a process of due diligence begins whereby they and/or their professional advisors take a closer look at your business. This is with a view to confirming your claims and establishing that the figures you’ve provided can be relied upon.
Being transparent and honest about your business with prospective buyers will encourage confidence, and can speed up the process. So what does buyer due diligence typically involve?
Here are just a few due diligence checks the buyer may want to undertake:
- Scrutinising the business’ financials, including cash flow and sales forecasts, statutory accounts and management accounts, as well as contractual arrangements that are in place with suppliers, customers, and staff
- Looking at asset registers and information on intellectual property – whether IP is protected with trademarks and patents where appropriate, for example
- Speaking with members of staff, and possibly clients, to obtain a more rounded picture of your business
Buyer due diligence is a key part of the selling process, and one that can make or break a sale. If you think like a buyer and prepare the accurate figures and information they need to make an investment decision, you may be able to speed up this sensitive stage.
Negotiating with the buyer
When you first put your business on the market you’ll send out a Sales Memorandum, which provides general information about the business. It’s important to protect your commercial information throughout the sale process, and advisable to ensure any interested parties sign a Non-Disclosure Agreement (NDA) before receiving the Sales Memorandum.
As time passes, one or two serious buyers will emerge, and negotiations become more intense. At this point, a prospective buyer may wish to seek confirmation of the figures provided, and clarification on other issues.
This is when buyer due diligence begins, as mentioned above, and is typically followed by a further period of negotiations. This is with a view to reaching a deal that satisfies both parties, and irons out any issues or potential concerns for the buyer.
It’s highly advisable to secure the services of professional business sales brokers with experience in your sector to help you negotiate your business sale. It allows you a degree of separation from potential buyers, and provides time to consider any of their requests and demands.
The manner in which information is disclosed is also an important consideration during the negotiation stage. A professional representative can use their experience to navigate what can often be a fraught time for a business seller.
Selling a business is typically an emotional process, especially if you’ve grown the business over a long period of time. It’s easy to disclose too little or too much information to prospective buyers, or to disclose the information in the wrong way, and professional help in various forms is invaluable.
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Should you hire business brokers to sell your business?
Hiring professional business brokers with a proven history of successful transactions offers many advantages. A good business broker will ensure the process runs smoothly. They’ll manage the expectations of all parties, and deal with potential purchasers with professionalism and diplomacy.
Although you may decide to take part in negotiations yourself, a business broker can be instrumental in helping you achieve your objectives from the sale. Finding a good business broker is key, however, so what should you look for in this respect?
- Ask for referrals from their previous clients, contacting each one for an independent appraisal of their services
- Check the broker’s experience of conducting successful business sales in your sector
- Ask how will they market your business – have they built up a database of potential buyers for your type of business, for instance
- Consider whether they’re trying to sign you up too quickly, or if they allow you plenty of time to consider your options
- Do they want to learn about your business in detail so they can provide a professional service, or do they just skim over important information?
- Is the broker already representing many other business owners? Do they have the capacity to focus on your sale to good effect?
Selling your business is a hugely important decision, and one that typically marks the end of years of hard work. It makes sense, then, to investigate all your options, including the type of sale and different forms of professional support available for both healthy and distressed businesses.
If you would like more information on selling a business in the UK, please contact our partner-led team at Real Business Rescue. We can offer you a free, same-day consultation, and work from offices around the country.