Selling Your Business

1 Why Financial Planning Matters

Selling a business is not just about finding a buyer and signing documents. It’s also about optimising value and ensuring a smooth transition to your next chapter. Strategic financial planning can help you:

1. Maximise Sale Proceeds

By structuring your business in a tax-efficient manner and ensuring any liabilities are minimised, you can retain more of the final sale price.

2. Secure Future Income and Lifestyle

Post-sale, you may rely on the proceeds for retirement, to reinvest in new ventures, or to support your family. Robust financial planning ensures that lump sums or phased payments align with your goals.

3. Maintain Business Continuity (if Needed)

Some owners opt to stay on temporarily post-sale, or they might have legacy or reputation concerns about the company’s future. Proper planning addresses how to manage any ongoing involvement or succession issues.

4. Navigate Legal Complexities

From shareholders’ agreements to tax liabilities, selling a business in the UK involves numerous legal considerations. Financial planning, coupled with professional advice, can help you anticipate pitfalls and reduce risk.

2 Preparing for the Sale

2.1. Assessing the Right Time to Sell

Timing can significantly affect your company’s market value. You might choose to sell when

• Revenue and profits are strong and showing consistent growth.
• The industry is seeing consolidation or high demand for acquisitions.
• You’re personally ready to move on, whether for retirement, health, or a new venture.

An important part of financial planning is to align the sale with your personal circumstances. For instance, if you need to bolster your pension pot, you might wait until you can demonstrate another year of healthy trading before going to market.

2.2. Putting Financials in Order

Prospective buyers typically require several years’ worth of financial statements, including profit and loss accounts, balance sheets, and cash flow statements. Ensuring these are:

• Accurate and up to date
• Audited (if appropriate)
• Reflective of true business performance (i.e., minimal personal expenses booked through the company)

By cleaning up your books well in advance, you reduce buyer concerns during due diligence and position the business to command a higher sale price.

2.3. Strengthening Operations and Leadership

A company whose success is heavily reliant on one key individual (often the founder) can be perceived as higher risk. If possible, build a robust management team and document processes so the business can function without your constant oversight.

In some cases, owners take out Key Person Insurance prior to sale, especially if certain team members are integral to the company’s value. This can mitigate buyer concerns about what happens if a vital stakeholder leaves or is incapacitated.

3 Valuing Your Business

Valuation is part art, part science. Methods vary, but common approaches include:

1. Earnings Multiples

A buyer may pay a multiple of the company’s EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation). Multiples vary widely by sector, growth rate, and market sentiment.

2. Discounted Cash Flow (DCF)

Projects future cash flows and discounts them to a present value, reflecting opportunity costs and investment risk.

3. Asset-Based Valuation

Particularly relevant if the business has significant assets (e.g., property in a pension, specialized machinery, or valuable intellectual property). Subtracting liabilities from assets can provide a baseline valuation.

In all cases, you’ll want to present your company’s financial forecasts and growth narrative convincingly. Many sellers hire corporate finance advisers or accountants who specialise in business sales to help refine valuation and marketing strategies.

4 Structuring the Sale

4.1. Share Sale vs. Asset Sale

In a share sale, the buyer purchases the entire company, including liabilities. From a seller’s standpoint, share sales in the UK can be tax-efficient because they may qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) if conditions are met.

In an asset sale, the buyer acquires specific assets (e.g., equipment, customer contracts), leaving certain liabilities behind. Asset sales can be simpler in some circumstances but may create additional tax considerations for the seller, such as corporation tax on asset disposals, followed by a separate extraction of proceeds.

4.2. Payment Structures

• Lump Sum: A single upfront payment upon sale completion. Sellers often prefer this for certainty, although it may be subject to immediate tax.
• Earn-Out: Part of the sale price is tied to future performance targets. This can increase the final payout if the business continues to grow under new ownership, but it can also be risky if targets are not met.
• Deferred Payments: The buyer pays part of the price over time. While deferrals help buyers manage cash flow, they introduce credit risk for the seller.

Before accepting earn-outs or deferred deals, consider how these impact your retirement or reinvestment timeline. It’s wise to have legal and financial advisers perform due diligence on the buyer’s creditworthiness and structure payment clauses carefully.

5 Due Diligence and Documentation

Once a formal offer is made, the buyer typically undertakes due diligence on all aspects of the business—financials, legal contracts, customer base, intellectual property, and more. To facilitate this process:

• Prepare a data room with key documents (audited accounts, corporate governance records, contracts, etc.).
• Ensure all shareholder agreements and any Co-Shareholder Protection arrangements are up to date and consistent with the sale.
• Be ready to answer questions about strategy, risks, and competitive positioning.

Simultaneously, you and your solicitor will work on a Sale and Purchase Agreement (SPA). This legal contract details the transaction terms, warranties, indemnities, and any restrictive covenants preventing you from competing post-sale.

6 Tax Considerations for UK Business Owners

Proper tax planning is vital to maximise net proceeds. Some key elements include:

6.1. Business Asset Disposal Relief (BADR)

Formerly known as Entrepreneurs’ Relief, BADR can reduce the effective tax rate on qualifying business disposals to 10% (subject to a lifetime limit). To qualify, you typically must:

• Hold at least 5% of the shares and voting rights.
• Have been an officer or employee of the company for at least two years prior to sale (at time of writing).

6.2. Other Capital Gains Tax (CGT) Rules

For gains that don’t qualify for BADR, CGT rates can be up to 20% for higher-rate taxpayers on business assets. However, reliefs like Investors’ Relief may apply in certain scenarios (although it has its own specific conditions).

6.3. Company Structures

In some cases, owners use holding companies or alternative structures to manage the tax impact when disposing of a subsidiary. Complex planning can involve strategies like transferring commercial property into a pension beforehand, or leveraging existing SSAS or SIPP arrangements. Always consult a tax specialist for advice tailored to your situation.