Selling Your Business: A Guide for Owner-Managers

Selling a business is probably the biggest financial transaction most owners will ever make. It is also one of the least rehearsed. You only do it once, the buyer’s advisors do it all the time, and the choices made in the two or three years beforehand often shape the result more than the negotiation itself. This guide sets out what is involved so that you can plan ahead.

Start two to three years before you want to sell

If you can, start planning two to three years before you want to sell. That sounds early, but most of what makes a business attractive and tax-efficient to sell takes time to put in place: a track record of clean accounts, a management team that can run the business without you, and the tax conditions that depend on how long you have held shares or held a role. Selling in a hurry, because of ill health or a sudden offer, is possible but usually leaves money on the table.

Clean up the accounts and the business

A buyer will check your figures carefully, so make them easy to trust.

Accounts. Make sure the accounts are up to date, accurate and filed on time, and that you can explain any unusual items.
Personal expenses. Separate personal costs run through the company. A buyer will adjust profit for them, but each one invites questions.
Records. Keep contracts, leases, licences, insurance and employment records in order. Missing paperwork slows the sale and can reduce the price.
Tax. Make sure all returns are filed and all liabilities are paid or provided for. Problems found during due diligence cost more than problems fixed beforehand.

Reduce your dependence on you

Buyers pay for profits they can rely on after you have gone. If customers deal only with you, if only you know how things work, or if one or two customers account for most of the revenue, the business is worth less and the buyer will want more protection.

The fixes are practical. Build a second tier of management, write down how the business runs, widen the customer base, and move key relationships to other people well before the sale. This is slow work, which is another reason to start early.

How businesses are valued

A valuation is not a fact, it is a range, and what a buyer actually pays depends on negotiation. In outline, valuations are usually reached in one or more of these ways:

A multiple of earnings. The buyer applies a multiple to the profit, after adjusting for things like owners’ pay and one-off costs. The multiple reflects the risk and growth prospects of the business and of its sector.
Net assets. Used where the value lies mainly in property, stock or equipment rather than in profits.
Discounted cash flow. The buyer estimates future cash flows and discounts them to a value today. It depends heavily on the forecast.

What pushes the value up is the same in most sectors: recurring or repeat revenue, steady growth, healthy margins, a spread of customers, a capable management team and good records. We can help you understand how a buyer is likely to see your business before you go to market.

There are two main ways to structure a sale, and the choice has big consequences.

Share sale. You sell the shares in the company. The buyer takes the company with its history, including liabilities, so they will ask for warranties and may hold back part of the price. For the seller it is often simpler and can be more tax-efficient, because the gain is usually taxed as a capital gain.
Asset sale. The company sells the business and its assets, and the buyer leaves the company’s history behind. The company is taxed on any gain, and getting the money out to you afterwards can create a second layer of tax.

Buyers often prefer assets because it limits their risk; sellers often prefer shares because it is simpler and cheaper in tax. The structure is a negotiation, which is why the tax needs to be modelled before you reach heads of terms.

Tax when you sell

Most owners selling shares in their company pay Capital Gains Tax on the gain. Business Asset Disposal Relief can reduce the rate of tax on qualifying gains up to a lifetime limit, provided conditions about ownership, your role in the company and the nature of the business are met. [VERIFY: current Capital Gains Tax rates, Business Asset Disposal Relief rate and lifetime limit, and the qualifying conditions]

Other points to plan for:

Deferred and conditional payments. Part of the price may be paid later or depend on future performance. The tax treatment of these payments needs to be understood before you sign.
Selling to employees. Some owners sell to an Employee Ownership Trust, which can offer a tax advantage to the seller if strict conditions are met, though it changes who ends up owning the business. [VERIFY: current Employee Ownership Trust conditions and reliefs]
Restructuring beforehand. Reorganising the business before a sale, for example by inserting a holding company, can help but is full of traps. It needs advice and time, and in some cases clearance from HMRC.

The aim is to know what you will keep after tax before you agree a price, not after.

The sale process, step by step

A typical sale of a smaller business follows these steps, though the detail varies.

Prepare. Tidy the accounts and records, reduce dependence on you and agree a realistic price range.
Appoint advisors. You will normally need an accountant, a solicitor and, for many sales, a corporate finance advisor or broker to find buyers and run the process.
Market the business. Prepare a summary or information memorandum, approach likely buyers in confidence, and sign non-disclosure agreements before sharing detail.
Agree headline terms. Offers lead to heads of terms, which set out the price, the structure and the timetable. They are usually not legally binding, but they set the direction.
Due diligence. The buyer checks your finances, contracts, tax, employees and legal position. Expect many questions, and answer them promptly and consistently.
Contracts. The sale and purchase agreement fixes the price, payment terms, warranties and indemnities. Your solicitor leads, with your accountant dealing with the figures and tax.
Completion and handover. Money changes hands, shares are transferred and Companies House records are updated. You may be asked to stay on for a handover period.

The company secretarial side, such as share transfers, new directors and filings, is handled by our colleagues at Murphy Thompson Moore LLP.

Selling a Manchester or North West business

For a business in Manchester or the wider North West, buyers tend to come from a handful of places: competitors wanting to add customers or capacity, larger regional or national groups looking to expand into the area, your own management team, and sometimes family members. Each wants something different, and it is worth knowing which is most likely to pay most for yours.

Confidentiality matters in a local market where staff, customers and suppliers all talk. Decide early who needs to know and when. [DOUG TO CONFIRM: any local sale experience or sectors you would like to mention here]

If you are thinking of selling, what to do this year

Ask for a realistic view of what the business might be worth, and what you would keep after tax.
Check that your accounts and tax filings are clean and up to date.
List the ways the business depends on you, and start to change them.
Find out how any tax reliefs would apply to you, and whether you need to act early to qualify.
Talk to your family about what you want, because the answer changes the right route.

How KSBA can help

We act for owner-managers every year, so we know the figures and the history that a buyer will examine. We can help you prepare the business, model the tax on different structures, work with your solicitor and any corporate finance advisor, and make sure the numbers stand up in due diligence. We agree a fixed fee before work begins.

To start with a conversation, see our page on business advisory in Manchester or call 0161 835 2323.

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Related guides

This guide is general information, not advice for your situation. Tax rules change and the right answer depends on your circumstances, so speak to an advisor before you act.