Selling a business in the UK: Everything you need to know

Selling a business you’ve grown over the years is a big decision.

You might be looking to sell soon. You might not. Either way, it’s always a good idea to have an exit strategy ready so you can react effectively to any changes in your situation.

But whether you want to retire, release capital, or it’s simply time for a new challenge, a sale requires careful thought and plenty of planning.

So, our award-winning corporate finance team has written this guide to help. We’ve supported hundreds of business owners through the sales process over the years, so we know exactly what it takes to avoid extra costs, find a trustworthy buyer, and maximise the value generated.

We will cover:

• How to sell a business
• The importance of planning in advance
• The common pitfalls you should look out for
• Whether you can remain involved after the sale
• How an M&A advisor can help sell your business
• How long it takes to sell a business
• Your next steps

How to sell a business?

Step 1: Set your objectives

Before you go any further down the sales process, start by answering the following questions:

• Are you selling all or part of your stake in the business?
• Do you have a rough figure in mind that you’d be happy to settle for?
• Will you continue to be involved in the business in some capacity?
• Is securing the jobs of your current workforce a priority?

The answers will help form your objectives for a sale. Plus, potential buyers will also want to know precisely why you’ve decided to sell the business, so making these reasons clear and understandable to others is crucial.

Step 2: Carry out a diagnostics review

Just like selling a house, you’ll need to go through every inch of your operations with a fine-tooth comb. You want to highlight inefficiencies or recurring issues that could impact the value of your business.

Among other things, this should give you a detailed understanding of the efficacy of your workforce structure, company accounts, premises, purchase lease agreements and other contracts, and commercial agreements with buyers and suppliers.

The amount of work required as part of the review will depend on the nature and complexity of the business assets. Of course, you may already be conducting regular reviews of your business performance, in which case that information should be shared and discussed with those involved in planning the sale.

Step 3: Fine-tune your performance

Once you’ve completed a comprehensive review, you’re then in a prime position to act on the results, optimise performance and make your business more attractive to acquirers.

Buyers typically want to see evidence of regular profits, a skilled workforce and a healthy order book. However, they can also be swayed by forecasts for future growth and any USPs that set your business apart from competitors.

Again, this is why it’s a great idea to plan your exit strategy well in advance. Doing so gives you enough time to prepare your business for sale and make it as attractive as possible to potential acquirers.

Step 4: Understand your tax obligations

Many business owners make a costly mistake by overlooking the tax implications of selling their business.

Tax rules are also constantly evolving. We highly recommend getting professional advice (you’ll need it further down the sales process anyway). An experienced tax advisor can explain your likely tax liability following a sale and spot new opportunities as they arise.

Most business owners will pay capital gains tax (CGT) on any profit that is made from the sale of business assets, such as land and buildings, plant and machinery, and goodwill. But the type and amount of tax you are due to pay can vary depending on the nature of the sale itself and whether you are registered as a limited company director, a partner in the business, or a sole trader.

You might also be eligible for certain tax reliefs. For example, Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief) allows owners to reduce their capital gains tax rate to 10% on the first £1 million of gains.

Step 5: Prepare to approach the market

Once you’ve decided the time is right to look for a buyer for your business, you’ll need to prepare to approach the market. There is a specific process to follow when appealing to the market, and, more often than not, you only get one shot at it.

Key aspects that you should prepare in advance include:

• An information memorandum
• A detailed financial model
• Details of growth opportunities
• A potential acquirer list

Putting this information together can take a significant amount of time and effort, but it’s critical to attract buyers. And it can often prove crucial in securing a great deal.

It’s also a perfect opportunity to start collating a virtual data room, whereby the business owner and their support team gather together all the information that the acquirer typically requires as part of their financial due diligence.

Step 6: Find the right buyer

It always pays to garner as much interest as possible by marketing the sale to a wide range of buyers. Unless, of course, you plan on selling your business to a partner or family member, (learn more about exiting a family business).

Inexperienced owners, who aren’t familiar with how to sell a business, often waste a lot of time discussing deals with buyers who do not have access to the capital required for the transaction.

That’s why a rigorous vetting and screening process is vital. You want to find serious prospects and ensure less time and effort is spent on discussions that are going nowhere. A business broker can help, but keep in mind they’ll typically charge a commission for their services, which can be 5-10% of the final sale price.

For more information, read our detailed guide to finding a buyer for your business.

Step 7: Enter negotiations

Keeping your options open is a smart move. So, after you’ve received initial offers for your business, we always recommend opening negotiations with several viable, interested buyers. It puts you in a position to benefit from competitive tension between bidders.

This increases the chance of achieving the best possible price. Either from one of the parties trying to blow the others out of the water, or from a bidding war that incrementally pushes the price up.

Step 8: Agree on deal terms in principle

You then select the buyers you are potentially interested in progressing with.

At that point, the main details of the deal with each buyer should be documented in a ‘Head of Terms’ agreement. You can negotiate a number of these at the same time. However, once one is agreed, the selected buyer will (in most cases) have ‘exclusivity’, meaning that you will be legally obliged to end discussions with other potential acquirers.

There is a power shift at this point as the competitive tension is lost. It’s now essential to maintain momentum with the chosen buyer wherever possible and manage the steps required to get the deal over the line.

Step 9: Due diligence

Once initial deal terms are agreed, you can expect the buyer to start carrying out a comprehensive due diligence process.

They will want to understand everything about your business’s legal, financial, tax, operational, and other material aspects. You’ll take an active role in verifying information, providing documents, and clarifying any discrepancies.

This is where owners who have already established a virtual data room, as mentioned in Step 5, benefit from sustaining momentum in the deal. A virtual data room can make the due diligence process more streamlined and efficient for the buyer, which will ensure that credibility is maintained.

Even so, this can be a lengthy process as the buyer will want to determine the risks associated with acquiring the business.

Suppose they discover risks that were not identified or discussed before the initial terms were agreed upon. In that case, they may look to renegotiate the deal, so it is critical to remove any skeletons in the closet before talking to buyers. New issues often arise while in exclusivity, particularly when a process drags on for an extended amount of time. This is another reason why it’s imperative to maintain momentum once deal terms are agreed.

Step 10: Review final terms and complete the sale

As the due diligence process continues, legal documents (including a lengthy share purchase agreement – SPA) will be drafted and revised in accordance with the Heads of Terms, due diligence findings, and any subsequent negotiations.

These documents will outline the detailed terms of the acquisition and will provide details on restrictions, recourse, obligations, future payments, liability caps and any other legal stipulations. It’s crucial that your legal representative reviews and negotiates these documents in detail to ensure that everything is in order before agreeing on a completion date for the deal.

Finally, after months of preparation, you’re now ready to sign on the dotted line, complete the deal and receive your funds. You are now in a secure position to inform employees what will happen and how the sale will affect their current roles.

With the deal done, it’s time to enjoy the next chapter of your life!

The importance of planning in advance

Many businesses fail to sell due to a lack of buyers or issues during the sales process. To increase the chances of success and maximise value, advanced planning is essential.  

Here are the key steps we believe should be in your planning process: 

Finding interested buyers

In order to do this, it’s crucial to ‘present’ the business in the right way. The seller should be able to highlight growth potential and USPs, as well as any sales synergies between the potential buyer and seller. 

Tip! A business with a solid management team and clear growth opportunities is more attractive to buyers. 

Succession planning

As we mentioned above, a buyer will usually be looking for a business with an established management team (that are staying in the business), alongside significant opportunities for growth and expansion.  

Tip! Spend some time in advance of the sale to ensure that you have planned your succession in terms of management and key relationships, whilst also being able to demonstrate the credibility of the growth projections, even at a small scale. 

Due diligence

Regarding due diligence, it is critical to ensure that your business is properly prepared for a due diligence exercise. This process is becoming more and more intense, especially in the current economic climate, where buyers and investors are less willing to take risks.  

Tip! Ensuring that you have no ‘skeletons in the closet’ and that you have all potential issues resolved before approaching the market is critical to help ensure the successful completion of a deal. 

What are the common pitfalls I should look out for when selling a business?

Selling a business venture is a complex process, and putting a foot wrong at any stage can easily lead you to face costly charges and legal repercussions. Here are a few aspects to be mindful of:

1. Warranties and indemnities

Most purchase and sale agreements include a long list of warranties designed to protect the buyers’ position, such as stating that the financial records are fair and accurate, as far as you are aware.

Indemnities are different in that the seller includes them as a guarantee against specified potential future liabilities, such as legal claims that originated before but had not been concluded by completion.

If the seller is found to breach one or more of these warranties or indemnities, then the buyer may have the right to file a legal claim and seek compensation from the seller. You will have the opportunity to ‘disclose’ against any warranties, which means that you can provide any details of the business that are contrary to any of the warranties. The acquirer cannot bring a claim against you concerning anything that has been ‘disclosed’.

2. Balance sheet treatment

Most M&A deals are completed on a cash-free and debt-free basis, assuming that the business has a normal level of working capital. To determine the adjustments required to transact on this basis, an analysis of the balance sheet is required, and the adjustment mechanism must be agreed upon between the buyer and seller. This analysis is never black and white, and it requires experience to understand how the various aspects fit together.

Serious value can be won and lost in this negotiation, particularly where one party is unfamiliar with the theory behind the analysis required. A competent advisor will ensure value is not unnecessarily reduced via this adjustment and, in some cases, will help to generate additional value (often in excess of their fees!).

3. Confidentiality

If you’re planning to enter negotiations with a potential buyer, it’s a good idea to make sure there’s a confidentiality agreement (NDA) and buyer non-compete agreement in place beforehand. This protects you in case the deal doesn’t materialise, as it ensures that any information shared throughout negotiations and due diligence is prevented from being shared with competitors, employees or the general public.

4. Lack of transparency

It makes sense that you want to get maximum value from your business sale and ensure that it’s seen in the best light by prospective buyers. However, there’s a big difference between presenting the positives and misrepresenting the facts, particularly when it comes to financial records. The deal may be jeopardised if the buyer discovers any red flags or misrepresentations during due diligence.

Further, if they find any material discrepancies following completion, they may pursue legal action to recover their losses, plus the costs of making a claim (though, in reality, warranty and indemnity claims are rare).

5. Paying too much tax

This is a common way that you can incur extra costs when you sell your business. There is no substitute for the expert advice of an experienced accountant, especially when considering a major one-off financial event.

6. Know your business

One of the most common reasons a deal will fall through is if a buyer identifies material issues that the sellers and management are unaware of. Those involved with the sale process must be familiar with the business and be aware of any potential major problems. You should discuss these with advisors in advance of approaching the market.

Can I remain involved in my business after the sale?

Of course, you can certainly remain involved in your business after the sale. Selling your business doesn’t necessarily mean you need to walk away entirely. Recent studies show that as many as 75% of former business owners decide to remain involved as employees, consultants, or directors.

It really depends on how much time you’d like to continue investing in the business or what level of remuneration you’d like to continue to receive from it. All of this can be discussed as part of negotiations with the buyer, though it’s essential to clarify the exact terms within your new employment contract to ensure everyone is on the same page.

How can an M&A advisor help sell my business?

There’s a lot to consider when selling your business, and it’s normal for owners to struggle with certain aspects and complexities involved at each stage of the process, particularly if they have little experience with business transactions. That’s why calling on the support of specialist deal advisory services can ease the process, deliver peace of mind every step of the way and ensure you secure maximum value from the sale.

At Gerald Edelman, we form close working relationships with business owners and regularly assist with business sales, offering the following services:

• Business sale planning
• Diagnostic reviews
• Business valuation
• Financial modelling
• Detailed research into potential buyers
• Providing and collating virtual data rooms
• Approaching the market
• Deal negotiations
• Managing due diligence
• Advise and negotiate the treatment of the balance sheet for adjustments to the consideration for cash, debt, and working capital
• Working with legal teams to agree on terms and legal documentation
• Providing further advice following completion

Again, calling on the expertise of somebody who has been down the business sale path many times before is also a means to reduce stress and generate incremental values while maintaining momentum.

How long does it take to sell a business?

A common question with a common answer: it depends. Every business is different, and the length of the sales process will be determined by the circumstances of the seller, the prospective buyer, and the size and complexity of the business itself.

As a rule of thumb, we tell our clients to expect a minimum of six to nine months once the process has begun, although it can take more or less time than this, depending on the situation. Sometimes patience is the key to achieving the best deal!

Planning your next steps

Exit planning should be an integral part of any business owner’s strategy, even for those who simply wish to keep their options open. If you’re currently planning your exit strategy or want to discuss selling a business in the UK, our team is here to help.

Get in touch with one of our friendly M&A advisors today for a free consultation to talk through your situation and discuss your options.