I want to sell my business – FAQs
Deciding when to sell your business and who to sell it to are some of the hardest decisions you will make as an entrepreneur. Whether your motivation is retirement, restructuring a corporate group or focusing on other projects, selling your business can be a lengthy and complex process. Our Corporate Team has answered some common questions business owners have when looking to sell.
How do I prepare my business for a sale?
There are a number of things you can do to prepare your business for sale and assist the sale process to run as smoothly as possible. To get started, some key things to consider include:-
- Your professional team – you will need to put together a dedicated team to work with you on the sale. This might include your internal management team and external corporate finance, tax and legal advisers.
- Undertake an internal due diligence process – this will help to address and resolve any internal issues, helping you to save money in the sale process and increase the value of your business.
- Decide on the structure of the sale – will you be selling your company (a share sale) or the assets of the company (an asset sale)? Both will achieve the same objective, but each has different legal and tax effects that need to be considered.
If your business is part of a corporate group, you may wish to consider pre-sale restructuring to separate out profitable arms of the business from non-profitable arms, as a way to make it easier to sell the separate parts of the business when the time comes.
How much can I sell my business for?
When you decide to sell your business, you will need to place a value on it as a starting point for negotiations with proposed buyers. If you have never had to value your business before, it can be difficult to know where to start.
There are a number of valuation methods commonly used, and which one is most appropriate will depend on your business and the circumstances. An earnings-based valuation is typically used to value a trading company or company with strong historic profits. Alternatively, a net asset-based valuation is commonly used for a company with significant assets e.g. properties.
We have experience in valuing businesses and can work closely with your accountants and financial advisers. For a more in-depth view of valuations and how to maximise them, read our previous article here.
What information will a buyer need?
As part of the sale process, potential buyers will undertake due diligence to investigate certain legal affairs of your business. The purpose of due diligence is for the buyer to ensure that they are buying what they think they are buying. If anything unexpected is uncovered, the buyer may renegotiate the purchase price or other deal terms, or even pull out. This is why an internal due diligence process as a pre-step is important.
A buyer’s due diligence questions will be tailored to your business, but there are some areas that the buyer will almost always require information, such as:-
- Accounts, financing and banking arrangements
- Contracts and trading arrangements
- Assets e.g. plant, machinery, property, intellectual property, IT
- Legal and compliance matters including data protection, insurance, regulatory consents
- Any ongoing disputes
Often, to help with the smooth running of the due diligence process, a virtual dataroom is set up where the documents can be stored. Your professional team can assist with the set up and management of the dataroom and advise you on the right time to disclose information to the buyer.
How can I protect myself from future liabilities?
In the sale and purchase agreement, the buyer will request that you give certain warranties in relation to matters such as tax and other liabilities of the business. If you give a warranty and then it turns out to be untrue, the buyer could bring a breach of contract claim against you and seek damages.
Your legal team will be able to negotiate the warranties on your behalf and seek to put in controls for your protection. For example, a time limit can be put on the period within which the seller can bring a claim against you and a financial cap can be put on your liability.
A disclosure letter will also be prepared alongside the sale and purchase agreement as a way of protecting you against any future claims. The disclosure letter should list anything about the warranties that is not true and provide relevant documentation. Generally speaking, the buyer will not be able to bring a breach of warranty claim against you if they were already aware that the warranty was untrue because it was disclosed in the disclosure letter.
How much tax will I pay on the sale of my business?
Of course this will depend on the purchase price and when this is paid to you – for example, the buyer could pay the full purchase price on completion or defer some payments.
If you are a shareholder who also holds an office within the company being sold or its group, you may qualify for entrepreneur’s relief. This will reduce the capital gains tax payable by you on the sale of your shares from 20% to 10% subject to a £1million lifetime limit on gains. There are various other tests that will need to be met to qualify for this relief.
How can we help?
We have experience in advising shareholders at all stages of the sale process. For strategic legal advice on any of the matters discussed, contact our expert corporate lawyers as soon as possible.
This article reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
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We are solicitors in Camberley, Wokingham and London. In 2019, Herrington Carmichael won ‘Property Law Firm of the Year’ at the Thames Valley Business Magazines Property Awards, ‘Best Medium Sized Business’ at the Surrey Heath Business Awards and we were named IR Global’s ‘Member of the Year’. We are ranked as a Leading Firm 2020 by Legal 500 and Alistair McArthur is ranked in Chambers 2020.