If you are thinking of selling your business, planning is key. In this article, we outline some of the key areas to think about from a legal and financial standpoint.
Selling your Business
Even if you have an acceptable offer which came ‘out of the blue’ it is important to consider the below points and acknowledge that the process itself takes time and negotiations do not end until you sign on the dotted line.
Planning for such an event gives you time to make your business look as attractive as possible to a potential buyer and resolving a few common issues now can save time (and headaches!) later in the transaction and hopefully boost the value of your business.
Whether you want to retire, seek a new challenge, sell part to an investor, or pass the business down to a future generation, the tips below highlight the top things to understand BEFORE you seek a sale.
Valuation & Timing
First and foremost, understanding the potential value of your business ahead of any sale provides you with crucial information. The sale of your business needs to meet your personal expectations and fund your next venture (be that retirement or another business venture). By understanding how you value your business, what adds value and what diminishes value, you may be able to adjust certain things to bring the valuation closer to your expectations before you complete the sale.
Reduced profits or a loss, poor growth and a lack of reinvestment and provision of employment opportunities can influence how potential buyers will value your business. In those circumstances, you may determine that you would be better placed to wait until market conditions improve. Experience indicates that larger multiples are more achievable when there is strong evidence to support claimed profits. It is better to sell on a proven number than a promised number.
When selling your business you may also wish to consider completing the sale at your least busy period. For example, in the hotel industry, the optimum time for sale may be in September after summer earnings and before October/November where the season tends to be quieter.
The disposal of your business is likely to give rise to some kind of tax liability. This will differ depending on what you are selling (trade and assets or shares).
How much tax is payable, and by when, is determined by several factors including how and when the consideration is paid and whether Business Assets Disposal Relief is due. Comprehensive tax planning ahead of any sale helps ensure you maximise the net proceeds you will receive from the sale, after tax has been paid.
You might also be in a position where you have property or divisions which you don’t wish to sell. These will need to be ring-fenced in some way. There are typically tax consequences to this, therefore you need enough time to action this and obtain clearance before a sale (up to 12 months).
Get your house in order
Some of the most common tasks that hold up sales and are often pricier to fix later down the line are:
- Inaccurate Statutory Books – These are records which outline the historical and current ownership and the people who are responsible for running the company. Every UK company is required by law to have a set of statutory books and records and to maintain them. Do you know where yours are, and are they up to date reflecting all previous share and director changes?
- Companies House filings – Although not all the same details in the Statutory Books are needed at Companies house, it should also be kept up to date and reflect a true picture of the company’s history. Confirmation statements do not often show the correct shareholdings due to a miss filing many years prior.
- Share Certificates – Before selling your shares you require evidence of share ownership, do all current shareholders (and previous owners) have the correct documentation entitling them to the shares they think they own? Do you also have evidence that the correct stamp duty was paid on previous transactions to avoid penalties, fines, and delays?
- Disputes – Are there any current disputes with a supplier or employee? A settlement agreement could bring the matter to a close and solve this issue before a sale.
- Are your Articles of Association and shareholders agreements up to date? Do they do what you need them to do i.e. in the event of a sale, are shareholders given a percentage of the proceeds of sale? Do you have protection if a minority shareholder wants to block a sale?
- Bank charges – It is quite common for lending to be repaid, but security charges to remain active at Companies House and Land Registry when in fact they don’t need to be.
- Consent to sell – It will be important, especially when assessing the timeline of a sale, to ascertain whether you require the prior consent of the bank, a regulator (for example the CQC or FCA) or perhaps a particular shareholder.
Check who owns the Intellectual Property (IP)
If you have a domain name or trademark, do you know whose name is it registered in? On selling your business, would you need to retain any IP rights and perhaps licence them back to the business once it is sold?
It is important you make sure any IP sits in the right place (with the business or an individual) now and set up the necessary assignments and licence arrangements to pre-empt issues further down the line.
Without a formal employment contract in place, employees may be able to give a short notice period before they walk and go and work for a competitor down the road – both unattractive things for a buyer and something which could affect the value of your business.
Other common issues which are found as part of transaction due diligence are:
- right to work checks are not done correctly (even UK employees need to have the required checks); and
- holiday pay is incorrectly calculated (for example, it is illegal to pay staff in lieu of statutory holiday during employment).
Both these can cause big problems – you may face fines of up to £20,000 per illegal worker and claims from employees for unpaid holiday pay, issues a buyer is unlikely to accept and will want you to fix pre-sale.
Employment is a key specialist area, for more information, please see our article on the top 10 steps for employers selling a business.
Outside of employment contracts do you have anything in place with your key customers or suppliers? Are they properly signed and dated?
It is also important to review your key contracts if a planned sale is upcoming, why? Because some contracts have an automatic termination clause in the event of change of control of a business and/or restrictions as to whether the contract can be transferred to the buyer, this may mean that a business may not be able to operate post completion. Something a buyer would not be happy about.
Property is a key area in transactions, a buyer will want to know what rights they will have to operate from the current site.
- Do you own or rent your property? If the property is leased, do you know how long is left on the lease and is it registrable?
If it is registrable but not registered, then the lease will be an equitable lease rather than a legal lease. This means a buyer is probably less keen to purchase and may insist the lease is registered pre completion or seek an indemnity (you pay them if something goes wrong) for the non-registration of the lease. Please note: Leases over 7 years in length are compulsorily registrable.
- Are there any problems with the land? For example, access disputes or contamination issues. These will need to be resolved before any sale.
- Is all your paperwork for regulatory/compliance obligations in place (for example, asbestos management, options to tax and energy performance certificates)? You may be fined if this has not been done, and there will be costs to consider in rectifying these issues too.
BEFORE providing any information to an interested party, speak to your advisor and ensure everyone signs a confidentiality agreement. This will protect you from disclosing information that either may cause a breach of law or be used against you by a competitor.
If you would like any further information regarding preparing your business for sale, or understanding the process for selling your business, please contact Jade Kent (for legal advice) on 07548 224516, firstname.lastname@example.org or Scott Hill (for financial advice) on 01392 351322, email@example.com