Selling a business in the UK is like handing over the keys to a newly furnished home. You’ve invested your time, effort, and resources into making it a masterpiece. So, it’s only natural that you’d want to get the best value from that sale. One of the best ways to achieve this is by knowing the different business sale strategies available to you. The approach you choose can impact both the outcome and the legal and tax implications involved.
This article covers:
Common reasons for selling a business and the importance of planning.
Business sale options and choosing the best one.
Steps to sell your business and the role of advisors.
Challenges in selling a business.
Frequently asked questions.
Why Sell Your Business?
The first step to determining the right sales strategy is to identify the reason for selling the business. Various factors determine a person’s motivation to sell their business. For some, it could be due to financial reasons. For others, the reasons may be more personal, like pursuing retirement, health concerns, or a desire for a career change.
Here are some of the most common reasons for selling a business:
Retirement
There comes a time when you’ll have to leave work life behind and embrace a lifestyle change. This is the phase where you get to sit back, enjoy the fruits of your labour, and spend more time with your loved ones. In cases where there’s no suitable person to take over, selling your business might be the next best thing. The advantage of selling in this situation is that it provides enough time to carefully plan your exit strategy.
New opportunities
As an entrepreneur, you may want to try your hands on something more lucrative or something that aligns more with your interests. Selling your business might be the best way to go. It allows you to move on to new ventures while also allowing you to free up time and resources to focus on the next chapter.
Financial needs
Sometimes, entrepreneurs may encounter financial challenges, which can arise from various factors such as unforeseen costs, declining profits, or shifts in the market. In these cases, selling your business could be a solution to resolve the financial strain. Alternatively, there may come a time when selling the business presents a chance to generate a substantial profit. This could occur if a strong offer is made or if there is a chance to capitalise on a popular market trend.
Health Concerns
Health concerns can make it difficult to manage the demands of running a business, which requires significant time and energy. Whether it’s a personal health issue or the need to care for an ill family member, these challenges can reduce your ability to operate at full capacity. In such situations, selling your business may be the best option to free up time and focus on your health or that of a loved one.
Partnership Disputes
Partnerships often start with a lot of promising prospects. Unfortunately, some of them eventually lead to disputes that can’t be resolved. These disputes could be over the company’s direction, investment decisions, and even financial limits. In the end, they create a toxic environment that greatly affects the success of your business. Selling your business allows you and your partner to salvage the value of your business and possibly venture into other lucrative fields.
No matter the motivation behind selling your business, it’s important to have a carefully crafted strategy before going forward with the sale. Considering the timing is also crucial when planning a business sale. This is because starting early gives you time to properly evaluate the business, improve its profitability, and resolve any possible concerns that could affect the sale. You’re also sure to gain more value when you time your sale to coincide with favourable market conditions. But on the other hand, a rushed or poorly planned sale can lead to undervaluation and missed opportunities.
Methods of Selling a Business
As an entrepreneur, there are many business sale options you can explore. These include:
Selling to a Third Party
This involves selling your business to an external buyer, such as a private equity firm or competitor. The process begins with valuing your business and marketing it to potential buyers. Business brokers or advisors can assist in finding suitable candidates. Once a buyer is found, you’ll negotiate terms, including the sales price and any liabilities. After an agreement is reached, the final step is to complete the legal and financial paperwork to close the sale.
Pros
Potentially higher sale price: Third-party buyers, such as private equity firms or competitors, often have more capital to invest and may be willing to pay a premium for the business.
Access to new resources: Since third-party buyers are investors or firms, they may have access to new resources such as technology and distribution channels, which can ensure the business continues to thrive.
Immediate Exit: Selling to an external buyer allows for a clean break, with no further involvement or emotional ties to the company.
Cons
Longer sale process: It usually takes a long time to find a suitable buyer. Even after finding a suitable buyer, negotiating the sale terms can be time-consuming, sometimes taking years to finalise.
Loss of control: Although a third-party sale gives you a clean break from the company, it also implies that you lose control of the company.
Increased risk: If the full sale price isn’t paid at closing, you may face delays in receiving the balance. Options like promissory notes or earn-outs may require you to wait longer for full payment, adding uncertainty to the deal.
Management Buyout (MBO)
In the UK, a management buyout occurs when the company’s management team combines their resources to acquire all or part of the company they manage. The management team usually takes full control and ownership of the business, using their expertise to advance the company. An MBO process in the UK typically starts with an indication of interest in acquiring the company from the owner, followed by a company valuation to determine the purchase price. The management team then secures financing through loans, private equity, or seller financing. After this, both parties negotiate the terms and close the sale.
Pros
Smooth transition: Since the management team is familiar with the company’s culture and values, the transition process is usually seamless with minimal disruption to the company’s operations.
Continuity: Because of this familiarity, it’s easier for the management team to uphold the company’s culture, values and strategic direction.
Faster sales process: An MBO already has a designated buyer, which is the management team, and negotiations are usually easier.
Cons
Financial challenges: It may be difficult for the management team to secure the necessary funding and this could delay the sale.
Lower sales price: Unlike third-party buyers, the management team often lack the financial resources to pay a high sales price.
Internal Conflicts: After the sale, potential conflicts may arise regarding investment decisions and the future direction of the company.
Selling to Family Members
If you’re looking to keep your business in the family, you can consider transferring ownership to a close relative. The process starts with finding a willing and capable family member to take over the business. Subsequently, a business valuation is conducted to set a fair price, and negotiations are carried out. Unlike other business sale options, the handover process is usually gradual to allow the family members to adjust to their new roles.
Pros
Maintaining family legacy: Selling to a family allows you to keep the business in the family and preserve its legacy for generations.
Trust and familiarity: Due to the inherent trust and familiarity among family members, there are little to no doubts about the buyer’s intentions or capabilities.
Retention of the company’s culture: A family member is more likely to uphold the company’s culture and values since they’re familiar with them.
Cons
Family dynamics: Selling your business to a family member could sometimes lead to family drama. Also, emotional ties sometimes make it difficult for family members to make rational decisions or negotiate the terms of a sale.
Financing challenges: In most cases, the family member may not have the financial resources to pay in full, making it difficult to decide on the appropriate financing structure.
Employee Stock Ownership Plan (ESOP)
An ESOP is a strategy where employees gradually gain ownership of a company by purchasing shares over time. The process starts by creating an ESOP trust, which buys shares from the owner on behalf of employees. The business funds the trust through profits or external financing, and employees don't directly pay for the shares. Instead, shares are allocated based on employees' tenure and compensation. As more shares are distributed, employees gain increasing control of the company, providing a smooth ownership transition over time.
Pros
Incentivised workforce: An ESOP enables employees to become part owners of the business. This serves as an incentive that drives employees to be more loyal, productive, and dedicated to the company’s success.
Gradual transition: The transition of ownership is gradual which gives the owner enough time to exit the company on flexible terms and ensures continuity of the company’s work structure.
Cons
Complexity: Managing an ESOP is a complex process. It involves several legal, financial, and administrative requirements.
High costs: Establishing and managing an ESOP is usually expensive as it involves costs relating to legal and administration fees.
Merger or Acquisition
A merger occurs when two businesses combine to form a single larger entity, while an acquisition involves one company taking over another’s ownership and operations. The process for both usually starts with discussions between the companies' Boards, followed by negotiating terms, presenting a letter of intent, and conducting due diligence. Once all parties are satisfied, the agreement is drafted, the deal is executed, and payments are made to finalise the transaction. Business Merger and acquisition helps companies grow, expand market reach, or streamline operations.
Pros
Higher sales price: Mergers and acquisitions can result in a higher sale price, particularly when a strategic buyer is involved. This is because the buyer may be willing to pay more for the potential synergies or increased market share.
More financial resources: It gives the companies involved a chance to pool their financial resources together. It also opens the companies to new investment opportunities and allows them to reach a wider market audience.
Lower labour costs: Most mergers and acquisitions result in employees performing the same tasks. To streamline operations and cut labour costs, companies often eliminate duplicate roles. This helps reduce expenses while making the organisation more efficient.
Cons
Complexity: M&A transactions usually involve several processes including due diligence, legal agreements, and negotiations. In most cases, they are time-consuming and costly.
Increased legal costs: Since M&A processes are complex, it’s essential to involve the right professionals to ensure that all the legal aspects are properly handled. In the end, you might have to pay a ton of money for legal consultations.
Preparing Your Business for Sale
Proper preparation is key to a successful business sale. Here are some steps to consider:
Business Valuation: This process involves determining the value of your business to set an appropriate sales price. Some factors to consider when valuing your business include your staff, revenue, reputation, and liabilities. However, there’s no one-size-fits-all approach to this, so it’s best to obtain a professional valuation to avoid undervaluing your business.
Financial Health: Another essential part of a business sale is the disclosure of the company’s financial condition. Your financial statements must be accurate and up-to-date to boost credibility and confidence in the sale.
Legal Considerations: When selling a business, there are important legal obligations to address, including intellectual property rights, contracts, and employee agreements. Ensuring compliance with these legal requirements helps avoid delays or complications during the sale process. To streamline the sale and minimise risks, it's advisable to consult a legal professional who can guide you through the process, ensuring all legal aspects are covered and handled properly.
Improving Operations: When you streamline your business operations, your business becomes more appealing to prospective buyers. Therefore, while preparing for a sale, it’s best to focus on efficiency, reducing unnecessary costs, and ensuring that your business can run smoothly without your direct involvement.
The Role of Professional Advisors
Professional advisors are essential when selling a business. They guide you through important steps, like valuing the business, handling legal documents, and managing financial records. With their help, the sale process becomes smoother, reducing the chance of mistakes and ensuring you get the best possible deal.
Legal Advisors
Employing the services of corporate solicitors or legal advisors can make a significant difference in determining the success of a business sale. This is because they possess an in-depth knowledge of contract law and other laws regulating sales transactions. Their role in a business sale includes drafting and reviewing contracts, ensuring compliance, and managing risk.
Accountants
Before selling your business, it's important to conduct financial due diligence to avoid any potential issues down the line. Working with an experienced accountant can prove useful during this process. Accountants also provide valuable advice on the tax implications of a sale and handle other financial aspects of the sale such as business valuation.
Business Brokers
Business brokers act as intermediaries between the seller and potential buyers. They also help to speed up the sales process by leveraging their networks and expertise to find suitable buyers. Additionally, they help guide you through the negotiation process so you can get the best possible results from the sale.
Potential Challenges in Selling a Business
Selling a business in the UK comes with several potential challenges:
Market Conditions: Economic factors heavily influence both the sale price and timing of a business sale. During an economic downturn, finding interested buyers becomes more challenging, and even when potential buyers are found, their offers may fall below your expectations. Economic recessions can lead to reduced buyer confidence and lower valuations, making it harder to secure a favourable deal.
Buyer Financing: Depending on the sale strategy you choose, buyers might find it difficult to secure adequate finances for the sale. This eventually leads to complications or delays in the sales transaction.
Emotional Attachment: For many entrepreneurs, their business feels like a creation they've nurtured from the ground up. This deep emotional attachment can make it hard to let go, often leading to second-guessing the decision to sell. This hesitation can result in delays in the sales process as owners wrestle with the idea of parting ways with something they've invested so much time and effort into.
Legal and Regulatory Complexities: Employment laws, tax regulations, and intellectual property rights can also slow down the process.
FAQs
How long does it take to sell a business?
On average, the entire sales process takes six to twelve months. However, this time may be impacted by market conditions, sector health, and company finances. Having a clear objective and getting professional help can expedite this process and help you avert any risks involved.
What is the best method for selling a business?
The best method for selling your business depends on your specific goals. These goals could include maximising profit, ensuring continuity, or getting a clean break. Each business sale option has its merits and demerits so it’s best to pick one that best suits your circumstances.
How do I determine the value of my business?
There are various methods you can use to value your business such as price-to-earnings ratio, discounted cash flow analysis, or asset valuation. However, the method you’ll use largely depends on your company's financials and market conditions. Therefore, it’s always best to consult a professional to help give you an accurate assessment.
What are the tax implications of selling my business?
When selling your business, the amount of tax you’ll pay depends on your company’s structure and the profit you make. If you’re selling a limited company, you’re likely to pay two types of taxes. These include Capital Gains Tax on any profit you make from the sale and Corporation Tax on any chargeable gains. However, in the case of sole proprietorships, the tax obligations may be limited to Capital Gains Tax or income tax.
Can I sell my business if it has debts?
Yes, you can sell a business that has debts, but it does add risk for potential buyers. So, it’s best to disclose these debts to potential buyers who may then decide to take on the liabilities or adjust the sale price. It may also help to seek legal and financial advice to ensure that the process is handled smoothly.
Conclusion
There are various methods involved in selling a business. This ranges from third-party sales to mergers and acquisitions, management buyouts, and selling to a family member. Regardless of the business sale option you choose, preparing well for your business sale can significantly impact its outcome. You can also tilt the scales in your favour by enlisting the help of professional advisors such as accountants, legal advisors, and business brokers.
For professional help on how to sell your business and get the best value from it, contact LawHive. Our corporate solicitors are ready to help facilitate the sale of your business by helping with vital areas such as compliance, drafting of sales agreements, and risk management.