Selling A Business: A Comprehensive Guide
There are many reasons someone might decide it’s time to sell a business. It may be a positive decision based on a change of lifestyle such a desire to retire, or something negative like spiralling business performance forcing the owner out.
Being able to articulate the reasons for selling the business is something you should ensure you are able to do very early on because it is one of the questions buyers will definitely ask. A solid and confident answer will ensure buyers are reassured.
It is also important to consider your financial position, because selling a business may not automatically mean you make a profit. There are many costs associated with selling a business, such as any broker’s commission (10-12%), any upgrades to the business to make it more saleable, capital gains tax owed to the government, and any costs associated with transferring any lease to the new owner of the business.
Preparing your business for sale
To give yourself the best chance of success, starting preparations a year out will give you adequate time to prepare and essentially improve the desirability of the business so that it’s ready for the market. This could include safeguarding any valuable intellectual property, and improving its customer base, market share, the quality of the business model and projections.
When your business has a buyer, they will be given the opportunity to scrutinise the businesses’ books and records in-depth covering legal, financial and commercial issues.
Being prepared for the due diligence process can start very early too. Collate and ensure the accuracy of financial documents, for example:
- Tax returns
- Documents about any property lease
- Information about the shareholder position
- Employee, supplier and client contracts.
Using an accountant to organise this paperwork sufficiently can ensure a smoother process, as will speaking to us at Eric Robinson Solicitors. We are experienced commercial property solicitors who have a long track record of working closely with accountants to prepare businesses for sale.
You should also consider updating existing process documentation such as the employee handbook and resolving any ongoing commercial or contract disputes.
Valuing your business
A business valuation is not just the assets, it can be made up of:
- The historical performance of the business
- Its current performance including sales, turnover and profit
- The price to earnings ratio, meaning whether the buyer is likely to make their investment back within a certain period of time or not by analysing the annual profits
- The business plan including any future projections
- Its current financial situation including cash flow, debts, expenses and assets
- Why the business is being sold
- Any outstanding legal issues
For this complex piece of work, consider hiring a professional business appraiser and involving your solicitors at this point also. Having a thorough understanding yourself of what led to your business valuation figure is also very useful in preparing you to defend the estimate to potential buyers. Having adequate supporting evidence at your disposal is also helpful for this.
Finding a buyer
The first thing to consider before setting out to find a buyer is whether you need to talk to your employees first because this is the point at which news of the business being sold becomes harder to conceal. This depends on the visibility of the methods you are using, for example, an online business listing site is easily found and has the potential to cause unease among your workforce if not prepared for the upcoming change.
There are, however, many other methods for finding a buyer for the business including personal connections, or using a broker which may be more subtle.
Using a business broker can be beneficial in saving time, and they may secure a higher price than you otherwise could have commanded. It is important to consider the commission they will take though which can be around 12%.
Conducting extensive due diligence on potential buyers is also crucial, including credit checks. This is something your solicitor can manage, get in touch with Eric Robinson Solicitors today to see how we can make this process as smooth as possible.
This being said, the process of finding a buyer is still likely to be the longest phase of the business selling process and can even take multiple years.
Agreeing a value/terms of the sale
Once you enter negotiations with a buyer, the involvement of a solicitor is crucial. They will be able to help iron out the many terms of the sale which need to be agreed at this point including:
- What premises/equipment is being sold with the business? What is and isn’t included?
- The payment terms: are you being paid in full or in instalments? What is the security if the buyer defaults on instalments?
- How will your information be protected during the negotiations? What needs to be included in non disclosure agreements?
- How to ensure you abide by the terms of any partnership agreement you have.
Negotiation should be carried out in an honest and transparent way, ensuring that you have points upon which you can stand firm with enough points over which you are willing to negotiate.
Once an offer has been made and accepted, a period of due diligence can begin. As mentioned above, the buyer will have the opportunity to scrutinise businesses’ books and records in-depth covering legal, financial and commercial issues. It is important to remain transparent, and your preparation will hopefully pay off here if you have access to up to date and accurate documents such as:
- Statutory accounts
- Monthly management accounts
- Employee information
- Client and supplier contracts
- Shareholder agreements
A solicitor can ensure your best interests are looked-after when your sales contract is drawn up, and passed back and forth for amendments.
Other paperwork that will be reviewed, signed and eventually exchanged includes:
- The purchase and sale agreement
- Tax deeds and covenants
- Indemnity agreements
- Transfer documents
Our Commercial Contract Solicitors at Eric Robinson can help with this. We will rigorously negotiate on your behalf to ensure that the terms are favourable to you and, if the other party will not compromise, we’ll ensure that you are fully aware of the risks which may be involved.
After the sale has completed
The way this period of time plays out really depends on the terms of the sale of your business. For some former owners, they will remain involved with the business in a transition period, or they may be cutting ties completely. Regardless, the help of a solicitor will ensure that all loose ends will be tied up in a way that means all stakeholders are satisfied.
Last actions include making sure to notify HMRC of the sale of your business if you are registered as self-employed, and talking to your employees if you haven’t already. It is important to let them know what will happen and how they will be supported.
How Eric Robinson Solicitors can help
If you are thinking about buying, selling, or merging a business, speak to Eric Robinson about how we can help.
Our specialist Commercial Law Solicitors can advise you on the processes involved and help you avoid the pitfalls of what is often a complex process.
Make sure you also check out our other comprehensive guide on Buying a Business.