15 FAQs people ask about planning to sell your business
The more time you allow yourself, the better. Most people find it takes at least a couple of years to prepare effectively.
Grooming the business for sale may involve changing your business strategy: for example, to maximise short-term profits. Implementing the new strategy may take years rather than months.
Putting in place tax-efficient strategies for realising your investment in the business may also require several years. For example, one option might be for your company to make sizeable contributions to your pension fund over a period of years.
If you will also be retiring from the business, there will be other issues to address. For example, you may need to find and train a successor to run the business, while also arranging your personal plans for retirement.
The timing of a sale may be determined by, for example, the funding requirements of the business, an unsolicited approach by a potential purchaser or your wish to retire.
Alternatively, you may want to sell the business when you can get the best price for it. This can depend on general business conditions: for example, economic growth and the level of interest rates. It also depends on the performance of your individual business. If your business is performing strongly but you anticipate problems — for example, increased competition — it may be a good time to sell. Potential purchasers may take a more optimistic view of prospects and offer more than you feel the business is worth.
If possible, plan in advance and groom the business for sale.
If you own shares in a company, there is no general reason why you cannot continue to own the shares after you retire. However, private companies sometimes have provisions within their articles of association, or a shareholders' agreement, which require you to sell your shares when you stop being an employee or a director of the company. Those provisions may also require you to offer your shares to your fellow shareholders at a prescribed price, or one to be set by the company's accountant or auditor, or an independent expert, before offering them to a third-party purchaser.
If you are a sole trader and have employees in the business, you can retire from working in the business and still continue to receive the profits. You may consider this a suitable time to form a company (in which you own shares), and transfer the business to the company. This means you can stay involved, but as a shareholder of the company that owns the business, rather than owning the business directly yourself. At first, you will be the sole shareholder but the company can then also issue further shares to bring new owners in, and raise fresh capital, so you become one of several shareholders. You will need advice on how this will happen, to make sure that your position is still protected when the new shareholders are brought in.
If you are a partner, it may be possible to agree with the other partners that you will become a sleeping partner - in other words, that you will retain some rights to the profits of the partnership, but cease to take an active role in it. However, you will then remain liable for the debts of the partnership. You may want to seek an indemnity from your 'trading' partners.
Whatever form your business takes, you may in any case prefer not to retain ownership once you have retired. Many retired owners find it difficult not to interfere in the business going forward and to watch the new management take the business in a new direction which they may not agree with. There is also the reluctance and potential danger in being financially exposed in a business which they no longer control.
As an employee or director of a company, you are usually free to sell shares in the company without retiring. However, the company's articles of association (or, less commonly, a shareholders' agreement, or your employment contract) usually place restrictions on share sales. The most frequent restriction is one that says the directors can, at their absolute discretion, refuse to accept any transfer of shares. This might mean that it is only possible to realise your investment when you retire, because the directors will block any transfer or part only of your shares. It is possible to challenge directors' decisions in court - for example, on grounds they are acting from personal motives, rather than for the good of the company - but such court actions can be costly, and the outcome hard to predict.
It is now becoming more common for the new owners of a company to require former shareholders who were also employees or directors of the company to remain with the business for a certain period following completion of the sale to them. This has a number of advantages from the new management's perspective: it gives them a hand-over period; allows them time to learn about the business from the previous owner; and provides continuity in terms of customers' and suppliers' perceptions. However, there are tax implications for a shareholder who sells his shares but continues to be involved in the company.
If you are a partner in a partnership, your ability to withdraw capital depends on the partnership agreement. Usually, capital can only be withdrawn on retirement.
The most common way of selling your business outright is through a 'trade sale' to another business, usually already involved in the same industry. This can be achieved through an intermediary 'deal maker' who can approach competitors on your behalf on a 'no-names' basis. They can also help groom your business for sale and suggest potential purchasers, as well as advise you on a realistic sale price. Other sale possibilities include selling the business to its management (a management buy-out or MBO) or to an outside investor such as a venture capitalist.
You may want to sell only part of the business. Your options will include selling a part of your shareholding - to realise part of your investment - or issuing new shares for sale - to raise additional funds for the business. You might sell to an investor such as a venture capitalist, or another business might be interested in making a strategic investment in your company.
Alternatively, you might float your company on an exchange such as AIM (the Alternative Investment Market - London Stock Exchange's market for smaller companies) selling shares as part of the process. Floating your company is a more complex and time-consuming process, and is typically part of a strategy for raising funds to grow the business, rather than simply selling out.
If you wish to retain ownership but realise part of your investment, it may be possible to restructure the company's finances. For example, you might be able to increase bank borrowings and sell some of your shares back to the company.
Your options may be limited by the circumstances such as the business' profitability and cash position. They may also be limited by any shareholders' agreement, partnership agreement or a company's articles of association. For example, you might be required to offer your shares to existing shareholders before you can offer them to outsiders.
You may need to take into account the different tax implications of selling company shares as compared to the sale of company assets (eg a 'business sale'). Where a company sells its business (eg its business premises, goodwill, stock, customer lists) there will be a potential double tax charge on the proceeds of sale: the proceeds will potentially be liable to corporation tax once received by the company; and where the proceeds are then distributed to the shareholder (eg by way of dividend or by winding up the company), those amounts will also be subject to tax in the hands of the shareholder. If, however, you sell your shares in the company, the proceeds will generally only be liable to tax in the hands of the shareholder; the potential double charge to tax arising on a business sale is avoided.
As a seller, a sale of the shares of the company is generally a better option than selling the business of the company.
If you are a sole trader, you can sell the business or its assets, or form a limited company, transfer the business to it in return for shares in the company, and then sell those shares - which now, of course, carry control of the company that owns your former business.
If you are a partner in a partnership, the partnership agreement will normally specify under what circumstances (if any) you can withdraw capital and how this will be handled. Normally, you will be able to realise your investment only on retirement.
The future value of any investment you retain will, of course, depend on the performance of the business. This may be an advantage — if, for example, you wish to realise part of your investment because you need the cash, but believe that the business continues to have good prospects. On the other hand, you may be selling because you believe the value of the business has peaked.
Any purchaser will clearly be hoping that the value of the investment will rise. If you are prepared to retain part of your investment — or to link the price paid to the future performance of the business in an ‘earn-out’ transaction — this may give the purchaser confidence and encourage him to offer a fuller price. As part of an earn-out, the purchaser might also wish to negotiate your continued involvement in running the business. However, there are tax implications arising on ‘earn-out’ transactions which will need to be considered when structuring such transactions.
Your purchaser (commonly in a management buyout) may not have the funds to purchase the whole of the business straight away and you may therefore realise only part of your investment, with arrangements for the sale and purchase of the rest of the business in the near future.
If you are retiring from running the business, realising only part of your investment may risk causing confusion and conflict and may put the balance of your investment at risk. It can be more difficult to hand over management responsibility and authority to your successor: you may be tempted to continue to interfere, and employees may be unclear about who is really in charge.
It's usually a good idea to talk with your co-owners or directors about your and their future plans to give you time to talk through issues such as how you will realise your investment and when this will happen.
In a private company, you may be required by the articles of association (or a shareholders' agreement) to offer your shares to the existing shareholders. Alternatively, you may need to discuss plans to prepare the business for sale to a third party.
If you will also be retiring, there may well be other issues you need to discuss, such as succession planning and whether you will retain any involvement after you retire.
As an investor in a limited company, you should not have any liabilities (assuming your shares are paid up) once your shares are sold. However, as part of the sale documentation you will often be required to assume specific pre-completion liabilities, particularly in relation to tax, and give promises (warranties) about the assets, the liabilities and the history of the company.
If you continue to be a director, you will retain your responsibilities as a director. If you retire as a director, you will have no responsibility or liability for what is done after you retire. However, you may continue to be responsible for the consequences of decisions made while you were a director. For example, if a company of which you were a director goes into liquidation after you have stopped being a director, you could still be held liable (in part) for the debts of that company if you had allowed it to continue trading while you were still a director, when you knew (or you ought to have known) that there was no reasonable prospect it could avoid becoming insolvent.
You may also have other liabilities which you agreed. For example, you might have personally guaranteed the company's bank borrowings, or leased premises. As part of your sale and/or retirement plan, you should look into the possibility of avoiding these liabilities (for example, by getting the continuing directors or shareholders to take over the guarantees).
The position in a partnership is more complicated. You need to make appropriate notification of retirement to avoid future liability. You should take advice to ensure that you will no longer have any partnership liabilities.
You may be able to realise part of your investment without surrendering any ownership by refinancing the business. You raise capital by borrowing rather than by selling shares.
Alternatively, you may be able to bring in outside investors who have little or no control. For example, you could sell non-voting shares which give investors the right to a share of profits but no say in management. Similarly, a partnership might bring in a ‘sleeping partner’.
Selling only part of your investment may in any case leave you with a large degree or even total control. For example, as the majority shareholder in a company you would normally be able to appoint and remove directors and so control the company’s strategy.
Finally, you may wish to sell your business but prevent the new owner from certain actions. For example, you might want to protect loyal employees from the threat of being made redundant. In circumstances like this, one option is to draw up a separate agreement with the purchaser setting out any restrictions.
Clearly, any steps you take to retain control may make investing in your business less attractive to an outsider and so reduce the price you are able to achieve.
It is important to ensure that key employees are kept happy. Otherwise, if the potential purchaser realises that he may lose a large part of the workforce following completion, he may be reluctant to go ahead with the acquisition. Employees may feel mistreated if they do not feel involved in the process or do not receive part of the sale proceeds. Conversely, if they receive a windfall payment they might feel there is no longer any reason to stay. At the same time, employees may resist and resent any change in strategy brought about by the involvement of a new investor and may be anxious about a new investor. It will be necessary to work with the potential purchaser to avoid this situation, impressing on the employees any benefits of the acquisition which there could be such as increased benefits and job security.
A sale can also affect relationships with customers and suppliers. In some cases, contracts — such as supply contracts — may include clauses which allow the contract to be terminated in the event of a change of control. The purchaser may wish to talk to customers and suppliers prior to completion to reassure himself that they will remain with the company. This will often weaken your position as a seller, particularly if the sale does not go ahead, causing damage to your credibility.
Any withdrawal of capital from the business must be carefully analysed. Leaving the business undercapitalised could be disastrous.
If you are retiring as part of the sale, succession planning is crucial. You will need to find and groom a successor, and then step back. You will also need to ensure that business relationships which were based on personal relationships with you can be maintained.
There are many different ways of valuing a business, depending on the circumstances: for example, based on earnings, cash flow, turnover or asset value. A growing business in a sector with good prospects will be more highly valued than a mature business in a declining industry. Your advisers will be able to provide an indication of what you can expect.
Ultimately, however, your business will be worth what a purchaser is prepared to pay for it. 'Grooming' your business can help to increase its likely value.
Your business will be more attractive if it shows strong, consistent financial performance over the past few years. It may be appropriate to modify your strategy, focusing on short-term results rather than long-term investment plans. There may also be some flexibility in the way you present your financial accounts, such as minimising any provisions for bad debts or old stock. Discuss your plans with your advisers.
The business is also often more attractive if it is not wholly reliant on one or two major customers, suppliers or employees (including yourself). Low staff turnover can also be attractive to a purchaser as it indicates a contented workforce with sound business knowledge.
Aim to present potential purchasers with as 'tidy' a business as possible. Systems and relationships may need formalising. This includes ensuring that you have:
You may also need to tidy up any areas where important business assets are owned by you personally. For example, if the business relies on intellectual property which you own personally, you will need to arrange to assign or licence the intellectual property to the business. Similarly, it might no longer be appropriate for your pension fund to be invested in the premises which the business occupies.
The tax position on selling a business can be extremely complicated. You may need to consider the tax consequences for the business, for you personally, and for the purchaser. Taxes involved could include capital gains tax (for the business and/or personally), stamp duty on any sale of shares, stamp duty land tax on the sale of business premises and income tax. You may also want to consider inheritance tax planning at the same time.
There is a wide range of options for minimising tax liabilities. For example:
The best option will depend on the circumstances, and the most tax-efficient strategy may take a long time to implement. Take expert advice, well in advance.