This article was reviewed in April 2024.
Whether you’ve spent decades building up your business and are planning to take a step back, or you’re ready to let go and try something new, selling your business isn’t a decision that’s made lightly.
A successful exit strategy takes a lot of planning to ensure you secure the best valuation possible and a suitable buyer to take over. Changing business ownership also presents several legal and tax questions, which is why our experts are here to walk you through how to sell your business.
Preparing your business for sale
You’ll first want to assess how appealing your business is to potential buyers.
- Do you have a growing, loyal, customer base?
- Have your profits been increasing consistently?
- Do you have a strong position in your market?
- What is your potential for expansion?
These are just a few of the factors that make it easier to find a buyer, so it’s worth spending some time making sure your business is in a good position before going to market. Here are some actions you can take to put your best foot forward for a smooth transition:
- Organise your records, contracts, and paperwork
- Make sure your accounts are up to date
- Resolve any ongoing disputes
Valuing your business
It’s time for the numbers: how much is your business worth? A business is more than just its assets. Buyers will be looking at your staff, revenue, liabilities, reputation and more, which can make settling on a price more difficult. Unfortunately, there’s no one-size-fits-all rule for business valuation, but there are several ways you can estimate the market price.
One popular valuation approach is the price-to-earnings ratio, sometimes known as the profit multiplier method. For a prospective buyer, this process gives an indication of whether they’re likely to make their investment back within a certain period by assessing the annual profits of your company.
You’ll need to consider things such as; what will happen to your staff? What property do you have – if it’s leased, in all likelihood, you’ll need your landlord’s consent? What existing debts do you have? What ongoing contractual agreements do you have, and are these to be terminated or assigned if the T+Cs allow?
If you are a limited company, you need to consider whether to do an asset sale or a share sale. There are significant differences between the two methods, not least the effect on the tax you will have to pay. Clearly any prospective buyer may also have their own view on this.
Ultimately, you’ll want to find a balance. You don’t want to undervalue your hard work, however, overestimating its worth can make it challenging to find a buyer at the right price.
Whatever price tag you decide on, you should be able to defend your valuation to interested buyers and be prepared for negotiations. If you’re unsure, there are independent professionals who can value your business and give you an expert judgement. This is particularly beneficial if you have a niche business or are operating in a specialised sector.
Finding a buyer
Next, you’ll want to go to market and find a buyer. A business broker can support you in finding the right buyer and advertise your business through suitable channels on your behalf. Always be very careful when choosing an agent to sell on your behalf, make sure you check them out carefully and read their terms and conditions thoroughly. The FSB legal advice line frequently receives calls from members who feel they have been mis-sold these services, generally via an unsolicited approach from the selling agent in question.
At this stage, you may want to take steps to ensure confidentiality and to protect your business against any prying from your competition. This can be done by getting the buyer to sign a non-disclosure agreement (NDA). Additionally, you may want to prevent word of the sale getting out before you’ve spoken to your team, who may be concerned about their job security and could start looking elsewhere. Avoiding such scenarios will minimise any speculation about the future of the business.
You will need to do extensive due diligence on your buyer before committing to anything. This could include seeking references and doing credit-checks .
Agreeing the terms of the sale
You’ll want to get the details in black and white so that all parties have a clear understanding of the terms. This could include the price, assets and when ownership will be transferred. This reduces the chance of any potential misunderstandings later down the line.
Are you being paid in full? If you are being paid in instalments, what will happen if the buyer defaults? What security do you have if this happens? Your solicitor should be able to help you with this.
If you’re selling a partnership, or your share in the partnership, you should check your partnership agreement. There may be restrictions and conditions which affect the sale that you must adhere to.
Completing a business purchase agreement
This agreement transfers ownership of the business to the buyer. It should include the terms, price, completion date and any clauses agreed in the previous step. As this is a complicated document with many factors to take into consideration it is always advisable to instruct a solicitor just as you would when selling a house.
Updating your team
If you have employees and the business is sold to a new owner, the Transfer of Undertakings (Protection of Employment) Regulations 2006, (commonly known as TUPE), may apply. These Regulations protect an employee’s rights when the business they work for changes ownership. Where TUPE applies, your employees will automatically become the employees of the incoming employer on their existing terms and conditions of employment, unless a redundancy situation applies. There is also certain information about the transfer you are required to give your employees, employee representatives and the new employer by law, as well possible employee consultation requirements.
Alternatively, where the sale of the business results in redundancies, a fair redundancy consultation process should be followed and redundancy payments made to eligible employees.
Telling HMRC you’ve sold your business
If you’re saying goodbye to self-employment, you need to contact HMRC to let them know and cancel your Class 2 National Insurance contributions.
Depending on whether you’re a sole trader, in a partnership or a director of a limited company, you have different responsibilities.
Sole trader
- Complete your final self-assessment by the deadline.
- Don’t forget to include the date you stopped trading.
- Pay any tax and National Insurance owed.
Partnership
- Fill out a self-assessment by the deadline if you’re selling your share.
- Selling the whole partnership? You must complete a personal self-assessment and the nominated partner must also fill out a partnership tax return.
- Don’t forget to include the date you stopped trading.
- Pay any tax and National Insurance owed.
Limited company
- If you’re selling the entire shareholding, you’ll need to appoint new directors before you resign.
- Notify Companies House of changes.
- Only selling part of your business? As we mentioned earlier, you need to let your staff know about the changes if they’re impacted by the sale.
Paying your taxes
If you make a profit when you sell, you’ll need to pay Capital Gains Tax (CGT). This may be reduced with tax reliefs such as Business Asset Disposal Relief, formerly known as Entrepreneur’s Relief. This is a reduction in CGT, meaning you’ll pay a lower rate of 10%. You must have owned the business for two years to be eligible.
The relief was reformed rather than scrapped in 2020, in part thanks to successful campaigning by the Federation of Small Businesses. The current lifetime limit is £1 million.
What about VAT?
If you’re VAT registered, you may be able to transfer your registration number to the new owner.