Selling Your Business: The Process Explained

Even if you have not yet found a buyer for your business, you should have an idea of what is involved if you agree to sell it. An irresistible offer may emerge out of the blue or sudden changes to your market may mean it is a case of getting out while the going is good, so it is worth familiarising yourself with what can be a challenging and uncertain process. This article is intended to set out some out the terms you should be familiar with if selling or thinking of selling, as well as some of the things you should be aware of before embarking on the sale process. Other articles in the series cover exit strategies, getting ready to sell a company and finding a buyer. This one starts at the point at which you have found a buyer.

Reaching an agreement on terms

The key details here are the price to be paid, how the offer is structured, which assets are being transferred and the date ownership of the business will be transferred. The sale contract will need to be drawn up by a solicitor.

Offers are likely to be in the form of one of the following: wholly cash, cash plus shares in the business post-sale, cash plus loan notes, an initial payment followed by payments subject to agreed criteria usually linked to how well the company performs post-sale.

Many sales are structured with payment by instalments. Make sure there are provisions in the contract for what happens if the buyer defaults on payments. Find out what security you can obtain to protect against a potential default. 

Sellers either sell the assets of the business or shares in the business.

Heads of terms

Heads of terms, also known as a term sheet or letter of intent or memorandum of understanding setout the key terms of the sale and the parties’ intentions.

They are the first stage in the contracting process and are not normally legally binding; however, specific clauses such as those that relate to confidentiality or costs can be made so. They usually include a confirmation of what has so far been agreed, the timetable for the transaction and the obligations of the parties to it.

Complex sales may involved more than one heads of terms agreement.

Typically they would be followed by a share or business purchase purchase agreement or a master services agreement.

Due diligence

This is carried out by the buyer to obtain legal, financial and commercial information about the target company.

The buyer will be looking for information that supports the valuation, for any matters that require more investigation and to locate issues that indicate the price should be negotiated downwards, or even suggest the purchase should be aborted.

This is the stage at which the buyer’s costs will start to mount as accountants and lawyers will be involved. The due diligence will usually result in warranties and indemnities that are binding on both parties or either party.

Completing a business purchase agreement

This document sets out the details of the transfer of ownership and should be drawn up by a solicitor with experience in the area. Essential clauses are the sale price, date of transfer, assets transferred and any terms arrived at in negotiations.

Confidentiality

Once you start the sale process, you must keep it as confidential as possible. A sale process can be an opportunity for rivals to find out more about your business – unhelpful if the deal does not go through – and to make overtures to your staff.

You also want to be the one to tell your team about an upcoming sale to reassure them the business will be in good hands and that they will be valued by the new owner.

Buyers should sign a non-disclosure agreement to ensure important information does not leak into the marketplace.

The flip side of this is that you should try to find out as much as you can about the potential buyer. Get some references from its customers, try to get an idea of its credit worthiness and check the Companies House website.

Tax on sales

All being well you will make a profit on the sale. This means you will be liable for capital gains tax (CGT) as a sole trader, limited company owner or partner. Corporation tax is payable on sale of business assets by a limited company.

The CGT allowance is £3,000, thereafter basic rate taxpayers are charged 10% CGT and higher and additional rate taxpayers 20%. The lower rate applies to a capital gain that takes the seller’s annual income to the £50,270 basic rate threshold and 20%applies to a capital gain that takes it above that. 

CGT is one of the taxes that the government is believed to be thinking of raising in its autumn 2024 budget (due on 30 October) so anyone part-way through a sale process should aim to complete it before this date.

Tax on asset sales

The sale of assets by limited companies is subject to 19% corporation tax for smaller companies and 26% for those with annual profits of above £250,000.

What tax allowances are available?

As well as the £3,000 already mentioned, business asset disposal relief is available to sole traders, self-employed partners, shareholders in a non-listed company and trustees selling trust assets. Qualifying asset sales are charged CGT at 10%.

It’s worth noting that the income tax personal allowance cannot be used to reduce a CGT liability.

Earn-outs

With an earn-out the seller receives a sum on sale and the rest in one or more payments over time depending on the company’s post-sale performance. While it is reasonable not to get all your money in one go, be very careful about agreeing to earn-outs. If the new owners aren’t as good as they think they are or if your market shrinks you will get less than you were expecting.

Where possible negotiate fixed payments unless you are very confident the business will grow under new ownership and that will be reflected in your earn-out. If buyers insist on an earn-out period as they want you and your expertise in place over the ownership transition period use that as a way of levering up the sale price.

What to do next

Selling a business without professional help is a daunting task. Negotiations can easily go wrong, buyers can be difficult to find and maximising the sale price takes expertise, let alone making sure the correct tax is paid. This article only touches on the many issues involved and anyone seriously considering selling their business will need bespoke professional help. 

For more information please see our article I'm Thinking Of Selling My Business. What Are My Options?

The friendly team at Finsbury Robinson will be able to deal with all your questions and give you advice tailored to your individual business. If you want help with devising an exit strategy or with selling your business, please call us on 020 8858 4303 or email us at info@finsburyrobinson.co.uk

 Angus Walker 01st August 2024

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