Written in conjunction with Kellands Hale, an independent financial adviser.
This article is not intended to be financial advice to any individual. The views expressed are those of the author and Moneyfacts.co.uk does not endorse the content.
If you’ve decided to sell your small business, you need to put a plan in place to facilitate your exit. The preparation stage can take a number of months, particularly if you want to maximise your chances of selling and get the best possible price in the process, so make sure to have realistic expectations.
Timing can be particularly important when it comes to a business sale. Perhaps your company has performed especially well in recent years and you want to capitalise on its enhanced value, or maybe you’re planning to retire in the not too distant future and want to start the exit process. Ideally you’d have been thinking about your exit strategy from the moment your business was conceived, though if you need to sell quickly – perhaps for ill health or family circumstances – you may have to run through the stages quicker than you’d perhaps hoped.
You can start the selling process by calculating your business’ current value, and you may want to make some tweaks to ensure it’s in the best possible shape, such as refurbishing premises. You’ll need to go through the accounts to ensure everything is in order, making sure to find the necessary documents to progress the sale, and you’ll also need to decide if you’ll want to use a business broker or if you’d rather arrange the sale alone.
Whatever route you go down, finding the right buyer is key – and there’s no telling how long this will take. You may be in the fortunate position of having someone approach you to buy, though more likely you’ll have to go out and find a buyer yourself, be it through your or your broker’s contacts, or through an aggregator website.
Assessing the marketability of the business is important at this stage – if you have a limited company are you confident that a buyer would want to acquire the company as it stands? Purchasers may be put off by past events e.g. risks of claims from customers or tax enquiries. There may also be other assets held in the company e.g. trading premises, investments etc. that a purchaser won’t want to acquire. As these factors can influence the saleability of the business (and the tax implications – see later) it may be necessary to look at restructuring the company ahead of time.
However you choose to go about it, you need to make sure you really “sell” your business, with the language used often being particularly important when it comes to small businesses sales. This may depend on what sector your business is in – will your potential buyers be more tempted by a family business with a history, for example, or perhaps they’re looking for something more modern and dynamic, or maybe they’re simply after a high level of repeat business and loyal customers. Whatever your business’ strong points are, make sure to highlight them.
Once you’ve attracted a buyer, you’ll need to go through a due diligence process, which involves a full appraisal of the assets, liabilities, tax implications and commercial potential. It usually takes between 60 and 90 days to complete (though for smaller businesses the checks can sometimes be completed within 30 days) and is where your preparation can really pay off – you’d have already been through your finances to make sure there isn’t anything that could be a red flag to the buyer, and you’ll already have compiled your documents to prevent delays.
There’ll likely be some negotiating involved when it comes to settling on the final price, and although there’ll often be a minimum you’re prepared to sell for, it’s worth being flexible, particularly when it comes to how you’ll receive the money. Being willing to accept it in instalments (known as seller finance), for example, may even encourage the buyer to raise their offer.
Business valuations are typically based on multiples of past profits, with 2-3x profit being a good starting point, though this is by no means set in stone. You may like to look on aggregator websites selling small businesses to get more of an average, making sure to focus on companies that are similar in size and turnover to your own. Asset-based valuations will include any assets that make up your business, which can be particularly important to consider for a company which owns any freehold properties, minus any debts or liabilities, or is holding surplus cash. Often, the final valuation will incorporate several different aspects to determine what the business is worth.
Don’t make the mistake of valuing your business based on future prospects; while potential can come into it, the starting figure should ideally be based on past performance, not on what your business could achieve but hasn’t yet done so. It’s worth speaking to your accountant to get a ballpark figure of your business’ value, though this can often be exceeded if it’s marketed well. Ultimately, the adage of a business only being worth what someone is willing to pay for it often holds true – think objectively about whether you’d pay for yours or a similar business to get an idea of what a realistic price should be.
Many people like to use a business broker to help sell their business, not only for the convenience, but also for the chance to have expert help on their side. A broker can oversee the entire process, from the initial stages of advertising the business and finding a buyer to negotiating a price and managing the sale through to completion, dealing with the inevitable issues that arise along the way. For those who haven’t had experience of selling a business before, having this kind of support can be invaluable.
Moneyfacts.co.uk has appointed Kellands Hale as our preferred independent investment advice firm. They may be able to help you review your finances and future plans, alongside working with a specialist business broker to help sell your business. Find out more.
Finding a broker may be possible through word of mouth – your lawyer, accountant, financial adviser or other people in your business network have probably come across brokers in the past – or you can search online. However, make sure to exercise caution with the latter route as business broking isn’t regulated, so always check credentials and ask plenty of questions to determine their suitability (such as the fees they charge, how they market your business, and their track record), and make sure to get a written contract.
While using a broker to facilitate the sale can be beneficial, that’s by no means the only option, and it’s perfectly possible to sell your small business yourself. This is especially true if it’s a microbusiness without a huge turnover or profit, in which case you may not want to pay a broker a sizeable chunk of commission, and would instead prefer to save the money and go direct. That said, having the experts on your side can sometimes prove to be a wise investment, so if you’re not sure about how to sell a business yourself it may be worth getting specialist support.
If you’re opting for the direct route, you’ll want to start by making a list of potential buyers. This could be a customer, supplier or even a rival, though most small businesses are sold to other small businesses, and there are often active acquirers in any sector that you may already be aware of. They may have even come directly to you, in which case lots of the hard work will already be done.
Once you’ve made a list, you can start approaching the potential buyers – either yourself or by asking a someone connected to you professionally, such as your lawyer or adviser, to approach them for you. Alternatively, you may simply be uploading your business onto an aggregator website, and will need to create a compelling listing accordingly.
This will largely depend on whether you use a broker or opt for a DIY approach, though there are plenty of standard costs to consider as well. These include things like legal fees, valuation costs, accountancy fees and advertising services, which will again vary depending on which route you go down, but still need to be taken into consideration.
Typically, the cost associated with a sale of shares in a company (although simpler to undertake) will be higher than a sale of business assets. This is because of the more onerous due diligence required by purchasers when acquiring a company i.e. by virtue of the trading history they will then be taking on. However, these costs may be outweighed by the reduced tax costs of undertaking a share sale (see later).
Broker fees may come in the form of a percentage charge, flat fee or sometimes a retainer, usually depending on the size of your business, with typical percentage costs in the range of 8-10%. Some will even offer a “no sale no fee” service, and if the business sells, you’ll pay them a percentage of the final price – though make sure to check the contract terms, as unscrupulous brokers can include clauses that will see them paid even if they don’t complete a sale.
If you decide to sell your business without using a broker, you may still need to market it on an advertising platform, which can come with additional fees accordingly. Overall it’s generally expected that the smaller the business, the lower the selling cost, and likewise larger businesses will command a greater selling fee.
If you’re in business with a partner and want to sell your share, you can certainly arrange a sale, though it’ll likely come with a lot more considerations and legal issues than if you were the sole owner. There’s also the option of selling a part of your business to someone else, which effectively means you’re bringing a partner into proceedings. In either one of these cases, advice can really be prudent; we’d recommend speaking to an independent adviser or broker who will be able to help.
In short, yes. However, the exact tax implications will depend upon how the deal is structured.
For sole traders and partnerships, the tax position is reasonably straightforward – you’ll pay Capital Gains Tax (CGT) if you make a profit on the sale. You’ll need to work out your gain to determine whether you need to pay CGT and, if so, how much you’ll be charged – this can be achieved by calculating the difference between the sale cost and any deductions (legal fees, VAT, what you initially paid for the business if applicable, etc). If you’re a higher or additional rate taxpayer you’ll normally be charged 20% CGT on your gains from the sale. If you have any leftover basic rate tax allowance this portion of the gain will be charged 10%. Individuals also receive an annual exempt amount (circa £12,000) to use against their gains.
However, Business Asset Disposal Relief (‘BADR’) – formerly known as Entrepreneurs’ Relief – may be a way to mitigate some of the tax you pay when selling a qualifying business. This relief means you pay a lower capital gains tax rate, which currently stands at 10% on the first £1m of qualifying lifetime gains, with any gains above this threshold charged at the full CGT rate (20% if you’ve received income or gains above the basic rate allowance in the tax year). This relief effectively halves the usual rate charged for higher and additional rate taxpayers.
If you have a limited company there are generally two main ways to structure the sale. One option is to undertake a “share sale” i.e. where the purchaser takes over your company in return for paying you proceeds. The other option is to undertake an “asset sale” i.e. where the purchaser acquires some or all of the assets of the business from the company itself. There are pros and cons to each.
A share sale offers the simplest (and often best) outcome, tax-wise. You’ll have a single layer of CGT to pay on any gain. BADR may also be available. Typically this applies if you’ve held a shareholding of 5% or more and been an officer or employee of the company for at least two years. The company must also satisfy the condition of being a “trading company”. As noted above, if the company holds non-business assets (e.g. investments) you may need to consider separating these off in some way more than two years ahead of any sale.
With an asset sale, corporation tax will come into play, as the company will have 19% corporation tax to pay on any profit made from selling its assets (typically goodwill). If you then want to extract the net proceeds from the company you’ll need to consider how best to do this. The money could be paid out as a dividend, but this will be subject to income tax. In most cases, you’ll want to extract the proceeds as capital, which will require a formal liquidation. However, you could alternatively keep the company going e.g. as an investment vehicle.
This is a very simplified overview and there may be other tax implications to consider e.g. if the purchaser wants to pay you over an extended period – perhaps, dependent on profit targets being met - or offers you non-cash consideration e.g. shares or loan notes.
It is advisable to engage a professional tax adviser to work alongside you through the sales process (and as early as possible). They will be able to guide you through the various tax implications, and advise you on any planning opportunities. This may include thinking about wider estate planning, particularly if you have come into a large amount of cash!
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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.