Sell your business

Prepare the business for sale

A sale of a small or medium-sized business typically takes 3 to 6 months from putting it on the market to completion, and preparation should start well before that, often 1 to 2 years ahead. A buyer pays more, and moves faster, for a business with clean records and few surprises. Before you go to market:

• have at least 3 years of accounts prepared by an accountant, and up-to-date management accounts
• review customer, supplier and finance contracts for change-of-control or assignment clauses
• check your lease for assignment and break clauses
• make sure the business, not you personally, owns its intellectual property, domain names and key assets
• reduce how much the business depends on you, by handing over key relationships
• settle disputes, claims and compliance gaps a buyer would find

Appoint an accountant and a solicitor who handle business sales early. For a larger business, a corporate finance adviser can run the sale.

Value the business

The price is what a buyer will pay, and professional valuations use several methods:

• A multiple of earnings, usually of profit before interest, tax, depreciation and amortisation. The most common method for a profitable business. The multiple depends on the sector, size, growth and risk
• A multiple of revenue, for a fast-growing or loss-making business
• Net assets, often treated as a floor
• Discounted cash flow, which values expected future cash
• Comparable sales of similar businesses

Get an independent valuation before you set an asking price. Owners often value their own business above what the market will pay.

Choose how to sell and find a buyer

Common routes are a business broker, who markets the business and screens buyers and is usually used for smaller businesses; a corporate finance adviser, who runs a structured process for larger deals; approaching competitors, suppliers or customers directly (a trade sale); selling to your managers (a management buyout); selling to your employees through an Employee Ownership Trust; online business-for-sale marketplaces; and, for larger high-growth businesses, private equity.

Keep the sale confidential until you are ready to tell staff and customers. Market the business with an anonymous summary, and require a non-disclosure agreement before you share detailed information.

A management buyout can give staff and customers continuity and is easier to keep confidential, because fewer outsiders are involved. The managers often need bank or private equity funding, and you may be asked to accept part of the price later (deferred consideration) or to link it to future results (an earn-out). If you accept deferred payment, take security over the business's assets so you are protected if they cannot pay.

Decide between a share sale and an asset sale

If your business is a company, you can sell your shares, so the buyer takes over the company as it stands, or the company can sell its business and assets. A sole trader or partnership selling the whole business can only sell its assets. A single partner can instead sell their own share of the partnership, which the guide on adding or removing a partner covers. The choice changes what the buyer takes on, what happens to your staff and contracts, and how the sale is taxed.

Agree heads of terms

Once you accept an offer, you and the buyer sign heads of terms, also called a letter of intent, before you both spend money on lawyers. They are mostly not legally binding, except usually for confidentiality and exclusivity. They typically cover the price and how it is paid (cash on completion, deferred, or an earn-out), the exclusivity period, the conditions that must be met before completion, the scope of the warranties you will give, any restrictions on you competing after the sale, and the target completion date.

Exclusivity binds you as well as the buyer: while it runs, typically for 4 to 8 weeks, you cannot negotiate with anyone else. Keep it as short as you reasonably can.

Prepare for the buyer's due diligence

The buyer will investigate the business, usually over 4 to 8 weeks. Set up a data room with documents organised by heading. A virtual data room service, or even a well-organised shared folder, lets you control who sees what and track what the buyer has opened:

• financial: accounts, management accounts, forecasts, tax returns and bank statements
• legal: constitutional documents, contracts, property documents and intellectual property registrations
• commercial: customer and supplier agreements and your sales pipeline
• employment: staff list, contracts, handbook and pension details
• regulatory: licences, permits, certificates and insurance policies
• property: leases, planning permissions and surveys

Most delays come from missing documents or problems found late. Anything you know is wrong is better disclosed now than found by the buyer.

Inform and consult your employees

In an asset sale, your employees move to the buyer under TUPE, on their existing terms. As the outgoing employer you must inform their representatives about the transfer, including any changes the buyer plans for them, and consult them about any changes you plan yourself. The buyer consults on its own planned changes. You must also give the buyer written employee liability information before the transfer. A tribunal can order compensation for failing to do either. In a share sale the employer does not change, so TUPE does not apply.

Negotiate the sale agreement

The sale and purchase agreement is the binding contract. Your solicitor negotiates it, but you need to understand the parts that affect you after the sale:

• warranties: statements about the business you guarantee are true
• indemnities: promises to repay the buyer for specific known risks
• the disclosure letter: your exceptions to the warranties. A matter fairly disclosed cannot usually found a warranty claim
• limits on claims: a cap on your total liability, time limits for claims, and a minimum size for a claim
• restrictive covenants: limits on you competing or poaching staff and customers
• retention or escrow: part of the price held back to cover claims

Negotiate the liability cap carefully: general warranty caps are commonly set at a proportion of the price, and specific indemnities may have no cap. Warranty and indemnity insurance can move some of the risk to an insurer.

Complete the sale

On completion day you sign the completion documents (in a share sale, the stock transfer forms, board minutes and resignations), the solicitors exchange documents, and the price is paid. You hand over keys, passwords and access, and the bank mandates are changed to the new owners. After a share sale, the buyer pays the stamp duty on the transfer, and the company updates its register of members and tells Companies House about new directors and people with significant control. A new director must verify their identity with Companies House and give their personal code before their appointment can be filed, so the buyer's directors should do this before completion.

Deal with tax and paperwork after the sale

If you sold shares or your own business, report the gain on your Self Assessment return and pay the Capital Gains Tax by 31 January after the end of the tax year of the sale. Claim Business Asset Disposal Relief if you qualify. If your company sold its assets, it pays Corporation Tax on the gain, and you are taxed again when you take the money out, so plan how to extract it: a members' voluntary liquidation can keep capital treatment where the amount is large, while striking off suits smaller amounts.

An asset sale can be a transfer of a going concern for VAT, so no VAT is charged. If you stop making taxable supplies, cancel your VAT registration. Close your PAYE scheme once your employees have transferred, cancel or transfer insurance, assign or novate remaining contracts, and tell your customers, suppliers, bank and regulators. Keep the sale agreement, completion accounts and your tax calculations for at least 6 years.