How to prepare your business for sale

Corporate solicitor James Pressley from Kirwans law firm looks at the key points to consider when thinking about selling your business.

Posted by James Pressley

Associate Solicitor, Kirwans

Mon 14th, Jan

You’ve shed blood, sweat and tears building up your business from scratch. But now, after what may well have been a long and painful decision-making process, you’ve decided to sell.

 So far so good – now the hard part really begins. Because long before you try and generate interest in the business, there are a number of important steps you might want to take . . .

1. Think about the best time to sell

Whether your reasons for selling are personal or business-related, choosing the right time to sell is crucial. Sellers can plan their exit strategy for up to several years before they actually put their business on the market, giving them time to make it as attractive as possible. If time is on your side, then you might want to avoid selling at a time of economic uncertainty. If you need a quick sale, however, make having a clear set of accurate and easy-to-understand financials your priority.

2. Structure for tax efficiency

If you have grown the value of your business, it is likely you will have to pay tax when you sell it. Your accountant or tax adviser can help you structure your business to minimise the amount of tax you will have to pay on a sale, but you need to do this before you start the sale process. There are also different ways to sell your business depending on the legal method used.  Most people selling a business will want to sell shares in their company, which is usually more tax efficient

3. Prepare sale documents early on

As far as buyers are concerned, clear financial documentation is key, so take as much time as is necessary to collate all the information you need. In particular, you’ll need to have the following documents to hand:

  •       Company reports;
  •       Last annual return;
  •       Profit forecasts;
  •       Key customer and supplier agreements;
  •       Details of business rates;
  •       Asset valuations;
  •       Property lease agreements;
  •       Insurance property;
  •       Employee contracts;
  •       Details of creditors and debtors.

Above all, ensure you have at least three years of trading accounts for any potential buyer to review. Having a detailed set of accounts demonstrates to the buyer that you’re organised and professional, and will also reduce due diligence time.

4. Don’t overvalue your business

Most sectors are familiar with the Earnings Multiples formula of valuation, multiplying the business’s annual earnings to value its worth, so the first step would be to find out what the multiple is for your sector in order to understand the sorts of figures you could be looking at. Comparing the prices of similar businesses listed on sites such as BusinessesForSale.com could also prove helpful. For a true picture of your business’s real value however, you’ll probably need to call in the professionals, such as an accountant. Ultimately, your business is only worth what someone else is willing to pay for it.

5. Ensure you’re not breaching your employees’ legal rights

Once you decide to sell your business, you’ll need to make sure you comply with employment law. If you are selling shares in your company, the position is a lot more simple, and your main concern will be the most sympathetic way to break the news to your employees. If you are selling your business (i.e. not selling shares in your company) then a law known as TUPE applies. TUPE means that all your employees will transfer to the buyer with your business.  There are complicated rules about when to tell your employees, needing to consult with your employees and what employee information you need to give your purchaser. Checking early with your legal adviser is essential to avoid unrest and the risk of legal action from your staff.

6. Check for loose ends that need tying up

If your business has grown quickly, the legal ownership of many of your assets may not be in the right place. A classic example is a company whose domain name is still listed as being in the personal name of its owner.  Another frequent problem is assets which tend to be on hire purchase or leasing schemes, such as vehicles or photocopiers. Check they are listed in the legally correct name and also check that you have not personally guaranteed payments on them without realising.

7. Consider the methods of marketing the business

Decide how you want to go about finding a buyer for your business, and whether you’re more comfortable using a broker or an online marketplace such as BusinessesForSale.com. If you’re listing it online, you’ll need to think about the sort of wording you’ll use to describe your business in order to make it attractive to the kinds of buyers you want to reach. If you are using a broker, there may be a broker who specialises in your area of business or, if not, you need to choose the broker most likely to reach your ideal buyer. You should also be aware that once you have signed up with a broker they will normally expect to take a percentage even if you found the buyer yourself, so check their terms and conditions.

8. Review your contracts

Whether it’s employee contracts that include restrictive covenants, supplier terms and conditions, or client contracts regarding the sale of goods or services, all contracts need to be watertight to reassure any interested parties that staff and clients aren’t going to just walk away once the business is sold. Appoint a legal expert to look over your current contracts and ensure there are no potential issues that could cause problems further down the line.

9. Consider your intellectual property

Many business owners don’t realise how much intellectual property they have or who owns it. For example, the copyright in your website might be legally owned by the person who built it. The same applies if you have a logo. If you own a trademark, you need to make sure it is properly registered and up to date. Perhaps most important since the GDPR came into force is your data; this is likely to be very important to your buyer and you may need your customers’ consent to transfer their data to your buyer. Check with your legal adviser to be sure.

10. Appoint a solicitor to draw up a non-disclosure agreement (NDA)

The very nature of going through the sale process means that potential buyers will insist on being given access to commercially sensitive information. Therefore, anyone viewing company data should sign an NDA to protect that information from being disclosed or exploited by the buyer.

11. Flag up potential issues

While there is a natural tendency to try and hide any negative elements relating to the business, it is vital to disclose anything that could pose a legal risk to the buyer if they complete the sale. As part of the sale process, it is very likely you will be asked to sign warranties (legal promises) that everything you have told the buyer about the business is true, accurate and not misleading, which could lead to legal liabilities. Employment disputes or any ongoing legal issues should be flagged up and explained as early as possible so the buyer understands exactly what they are taking on. 

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