How to dispose of (sell) your small business
Selling a business isn’t just about packing up your desk and walking away – it’s complex on several levels.
For a start, there are processes and procedures through which you must maintain compliance for the disposal to be successful.
The buyer and the seller must complete each stage of the disposal correctly for there to be a seamless transition.
On top of this, there can often be an emotional attachment to the company, making it all the more important to ensure it’s done right.
The asset valuation stage
Before selling your business, the first step is to establish an accurate valuation.
This involves a detailed analysis of your company’s financials, assets, liabilities, and future earning potential.
As a chartered accountant, I am also experienced in business valuation.
As a business valuer, my job is to objectively assess your business, accounting for market trends, revenue streams, and the industry landscape.
Common valuation methods include the earnings multiple, discounted cash flow (DCF) analysis, and asset-based valuation.
- The earnings multiple method considers your business’s annual profit, multiplied by a figure that reflects your industry and risk level.
- The DCF method analyses your business’s future projected cash flows, discounted to their present value.
- Asset-based valuation focuses on the value of your company’s tangible and intangible assets minus liabilities.
Understanding which method is appropriate is critical to achieving a fair valuation and it might be that you use more than one to get an accurate figure.
Preparing the financial statements
You’ll need to present clean and accurate financial statements to prospective buyers.
This includes profit and loss statements, balance sheets, and cash flow statements for the past three to five years.
These documents provide a snapshot of the financial health of your business and allow potential buyers to assess the profitability and risks involved.
As such, you might want to consider conducting a financial audit before selling.
This will give buyers confidence in the accuracy of your accounts and speed up the due diligence process.
Ensure your records reflect true operational costs, correct asset valuations, and realistic future revenue projections.
Any discrepancies could delay the sale or reduce your business’s value.
Organise the tax planning side of things
You may already be aware that selling a business can have significant tax implications.
Depending on the structure of your sale – whether you’re selling assets or shares – you could face Capital Gains Tax liabilities that eat into your profits.
Entrepreneurs’ Relief, now known as Business Asset Disposal Relief, may reduce this burden, but there are conditions attached.
To qualify for this relief, you must have owned the business for at least two years, and you can only claim on the sale of a trading business, not investment assets.
You’ll need to work closely with a tax adviser to explore ways of minimising your tax liabilities as structuring the deal correctly can have a big impact on how much tax you will ultimately pay.
For example, selling shares rather than assets can offer a more tax-efficient outcome for many business owners, but the specifics will depend on your individual circumstances.
Prepare your business for due diligence
The due diligence process involves a buyer thoroughly examining your business to ensure that everything is as you’ve presented it.
This can include financial, legal, and operational scrutiny.
To make this process as smooth as possible, ensure that all legal contracts, such as leases, employment agreements, and supplier contracts, are up-to-date and easily accessible.
Having a clear and organised set of documentation will speed up negotiations and inspire confidence in the buyer.
Buyers will also want to understand any risks or liabilities, such as outstanding legal disputes or environmental compliance issues.
It’s best to be upfront about these and have plans in place to mitigate any concerns.
Any surprises during due diligence could lead to the buyer reducing their offer or walking away altogether.
Negotiate the terms of the sale
Once you’ve identified an interested buyer, the negotiation process begins.
Here, it’s important to consider not just the price but also the terms of the sale.
- Will you be selling the business outright, or will you retain a minority interest?
- Are you selling the assets of the business or the shares?
Each option has different tax and legal implications, and these will need to be negotiated carefully.
You’ll also want to discuss any ongoing involvement you may have post-sale.
In some cases, the buyer may request that you remain involved in the business for a transitional period to ensure a smooth handover.
Consider the impact this will have on your time and whether it aligns with your long-term goals.
Additionally, the terms of payment need careful scrutiny.
Will the buyer be paying in cash up front, or will they be paying in instalments over time?
Some buyers may propose an earn-out, where part of the payment depends on the business hitting certain performance targets post-sale.
While this could increase the final sale price, it also carries the risk that those targets may not be achieved.
Consider your employees
If you employ staff, selling the business may trigger obligations under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).
This legislation protects employees’ rights when a business is transferred to a new owner.
You will need to inform and consult employees about the sale, and their contracts must be transferred to the buyer with the same terms and conditions.
Failing to comply with TUPE can lead to legal action from employees, so it’s important to address this early in the sale process.
Your solicitor will help ensure that you meet your obligations and manage this aspect of the transaction smoothly.
Time to finalise the deal
Once the due diligence is complete and both parties agree on the terms, the sale can be finalised.
This involves signing the sale agreement and transferring ownership.
At this stage, funds will be transferred, and any conditions precedent, such as obtaining third-party consents or regulatory approvals, must be satisfied.
Ensure that all closing documents are in order and that any post-sale commitments, such as transitional support, are clearly outlined in the agreement.
You should also review any non-compete clauses to ensure that they are reasonable and do not overly restrict your future activities.
We can help you with all of the steps outlined above and put you in touch with the right professionals to maximise the value of your business and ensure a smooth transition for all involved.
Please get in touch if you’d like more information on the topic of business disposals or if you’d like tailored advice and guidance based on your specific circumstances.