Selling a small business is a long and often stressful process, and it’s important that the transaction is treated with care. Here, we’ll take a look at some of the things you’ll want to think about should you decide to sell.
By Laura McLoughlin
To whom should I sell?
To secure the maximum possible price for your business, you’ll need to attract the attention of the largest possible market. This means selling publicly, ideally via a broker who’ll be able to publicize the fact that you’re looking to sell.
Given the magnitude of this transaction, it’s almost always better to go with a broker if you’re selling on the open market – they will provide the skills necessary to anticipate and avoid problems along the way. Just make sure that you go with a reputable one!
In some cases, however, you might prefer to sell privately, perhaps to a trusted friend or family member. Several factors might motivate such a decision. You might want the sale to proceed quickly, and therefore to forgo the formal procedures necessitated by a sale to a complete stranger. Or, if you’ve spent years (or decades) building the business, you might want some assurance that it’s going to be kept in the family, or at least that it will be under the control of some trusted, familiar person.
How Quickly Can I Sell?
Selling a business takes a long time – often several years from idea to execution. Unless you’re selling to a trusted individual, you’ll need to provide evidence of the good health of the business, and the buyer will want to have these claims verified by an independent auditor.
If it looks like you’re desperate to sell the business as quickly as possible, the buyer may, with some justification, begin to suspect that there’s something fundamentally wrong with it. This will risk expensive changes of heart. A rushed sale will also make administrative mistakes more likely, which can result in additional legal costs, and may even jeopardize the sale.
Once you’ve decided to sell, your first priority should be to devise an exit strategy for yourself. This is especially important if you’re heavily involved in the day-to-day running of the business. After all, if the business can’t function in your absence, its market value will be significantly diminished.
Before you sell, you’ll need to therefore appoint a successor and make yourself redundant. Ideally, you’ll want to do this several months before the sale itself, as this will allow you to demonstrate that the business can indeed work without your input.
As counter-intuitive as it might seem, this is a good time to invest in the business. Any sensible buyer is going to investigate your business’s assets, likely with the help of independent advisers. If your computer system hasn’t been updated in years, or your security system is unfit for purpose, then the buyer might well revise their offer accordingly. Moreover, they may assume that this lack of investment extends to other parts of the business.
Some sorts of investment pay off only in the long-term. As such, it’s important to make them as early as possible; that way, the resultant increase in profitability will become apparent on the balance sheets before the final price is agreed-upon.
What do I need to do?
Let’s talk about your obligations. Sole traders and partnerships must inform their staff that the sale is taking place, and why it’s taking place. If there are going to be layoffs, then it’s your duty to let your staff know about it. Don’t make the mistake of delaying a painful announcement for fear of unrest; the uncertainty will cause a great deal more stress in the long-run.
Another of your duties is the paying of Capital Gains Tax. A good accountant will advise on how to limit your liability, here. There are several means of doing so, the most notable of which is Entrepreneur’s Relief. This is a form of relief available to those selling a business which they’ve owned for more than a year. It will limit the amount payable to 10%.
Your accountant will also be able to transfer your VAT obligations to the new owner, along with cancelling your class-2 National Insurance contributions.
What paperwork do I need to collect?
You will need to demonstrate the value of your business to the satisfaction of the buyer. You’ll also need to compose a legally-binding document in which your terms of sale are laid out. Don’t be tempted to tackle this yourself; get a qualified lawyer.
Other important documents might include:
Lists of assets
Part of your business’s value will stem from equipment and raw materials. By compiling a list of assets, you’ll provide valuable information, which will inform the final sum.
Your business will have been liable for several varieties of tax over its lifespan. Buyers will hesitate if they view your tax affairs as remotely fishy. You can clarify matters by collating your tax returns in a single place.
Balance sheets demonstrate your business’s cash flow over time. Sustained profitability over several years demonstrates a healthy, valuable business. As with tax returns, the further back your balance sheets extend, the better.
Reports from third-party Auditors
Of course, your opinion that your business is profitable won’t be worth all that much. After all, you wouldn’t visit a restaurant on the sole say-so of the proprietor! While balance sheets will provide some objective evidence of your business’s good health, a report from a reputable third-party will help to put your business’s worth beyond dispute.
Note that audits come in several forms other than the financial sort. If you’re selling a shop, for example, you might bring in a retail auditor to assess your business’s operating practices, and point out ways in which you might improve matters.
The better informed your would-be buyer is about the makeup and running of your business, the less likely they are to revise their offer or pull out. It’s therefore crucial that you provide them and their representatives with the relevant documentation, preferably as early in the process as possible. Having done so, you’ll stand the best possible chance of emerging from the sale with a substantial roll of cash in hand!
Laura McLoughlin is a Digital PR based in Belfast. Her previous roles include website editor and journalist. She now works with Mackenzie and Dorman.