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Whether you’re planning to retire, release capital or it’s simply time for a new challenge, selling a business you’ve grown over the years is a big decision that requires careful thought and plenty of planning.
It’s important to remember that selling a business isn’t a standalone event, but rather a series of processes that require expert guidance and scrutiny at each stage. There are also a unique set of financial and legal implications that need to be managed well if you’re going to avoid extra costs, find a trustworthy buyer and maximise the value generated.
Even if you’re not intending to sell anytime soon, it’s always a good idea to have an exit strategy in mind so you’re able to react quickly and efficiently to any changes in your situation. We trust this guide will prove a useful resource for business owners looking to create a flawless plan that will deliver whenever they decide to sell.
In the following guide we will cover:
- What are the key steps involved in selling a business?
- What are the common pitfalls I should look out for when selling a business?
- Can I remain involved in my business after the sale?
- How can an M&A advisor help sell my business?
- How long does it take to sell a business?
- Planning your next steps
Step 1: Set your objectives
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? These are all questions you need to answer before heading further down the sale process.
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 diagnostic review
Just like selling a house, you’ll need to go through every inch of your operations with a fine-tooth comb 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 and lease 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 itself. 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, though they can also be swayed by forecasts for future growth and the 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 so that you have enough time to prepare your business 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 range of tax implications involved with selling their business. Tax rules are also constantly evolving, which is why it always pays to seek the professional advice of an experienced tax advisor that can guide you through and spot new opportunities as they arise.
The type and amount of tax you are due to pay will depend on the nature of the sale itself, and whether you are registered as a company director, a partner in the business or a sole trader. Business owners should also seek to clarify whether they are eligible for Business Asset Disposal Relief – formerly known as Entrepreneur’s Relief – whereby they may be able to reduce capital gains tax to 10% on their 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 certain process that should be followed when appealing to the market and, more often than not, you only get one shot at it during any particular process.
Key aspects that should be carefully prepared in advance include an information memorandum, a detailed financial model, details of growth opportunities and a potential acquirer list. This planning phase can take a significant amount of time and effort, but it often proves critical in securing an attractive deal. It’s also a perfect opportunity to start collating a virtual data room, whereby the owner and their support team gathers together all the information that is typically required by the acquirer as part of their financial due diligence.
Step 6: Find the right buyer
Unless you plan on selling your business to a partner or family member, it always pays to garner as much interest as possible by marketing the sale to a wide range of buyers. However, owners that are relatively inexperienced when it comes to selling businesses often waste a lot of time discussing deals with buyers that simply do not have access to the capital required for the transaction.
That’s why a rigorous vetting and screening process is important in determining serious prospects and ensuring less time and effort is spent on discussions that are going nowhere.
Step 7: Enter negotiations
After you’ve received initial offers for your business, we always recommend opening negotiations with several viable parties to keep your options open and to put yourself in a position to benefit from competitive tension between bidders.
This increases the chance that you’ll be able to achieve a higher final sale price and, where possible, start a bidding war between different parties that are interested in purchasing your business.
Step 8: Agree deal terms in principle
Once you have selected the buyers that you are potentially interested in progressing with, the main details of the deal with each should be documented in a ‘Head of Terms’ agreement. A number of these can be negotiated 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 in time as the competitive tension is lost, which means it’s now very important to maintain momentum with the chosen buyer wherever possible and focus on managing the steps required to get the deal over the line.
Step 9: Due diligence
Once initial deal terms are agreed upon, you can expect the buyer to start carrying out their own comprehensive due diligence on your business. Their intention is to understand everything about the legal, financial, tax, operational and other material aspects of your business and, as the seller, you will be expected to take an active role in helping the buyer verify this information, provide documents and clarify any discrepancies.
This is where owners that have already established a virtual data room as mentioned in Step 5 really benefit from being able to sustain momentum in the deal. This 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. If they discover risks that were not identified or discussed prior to the initial terms being agreed, they may look to renegotiate the deal, which is why it is critical to have removed 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 own 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!
Selling a business 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:
Warranties and indemnities
Most purchase 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 they are included by the seller as a guarantee against specified potential future liabilities, such as legal claims that originated prior to, but had not been concluded by, completion. If the seller is found in breach of 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 in relation to anything that has been ‘disclosed’.
Balance sheet treatment
Most M&A deals are completed on a cash-free and debt-free basis, and assuming that the business has a normal level of working capital. In order 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 between 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!).
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 in place beforehand. This provides protection 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.
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. If the buyer discovers any red flags or misrepresentations during due diligence the deal may be jeopardised. Further, if they find any material discrepancies following completion then they may pursue legal action to recover their losses, plus costs of making the claim (though in reality warranty and indemnity claims are rare).
Paying too much tax
This is a common way that owners can incur extra costs when selling their business. There is no substitute for the expert advice of an experienced accountant, especially when considering a major one-off financial event, such as selling your business.
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/ or management are unaware of. It is critical that those involved with the sale process are familiar with the business, and are aware of any potential major issues. These should be discussed with advisors in advance of approaching the market.
Of course. Selling your business doesn’t necessarily mean you need to walk away entirely. In fact, recent studies show that as many as 75% of former business owners decide to remain involved with the business as an employee, consultant or director.
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 important to clarify the exact terms within your new contract of employment to ensure everyone is on the same page.
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 M&A or 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 sale planning
- Diagnostic reviews
- 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 terms and legal documentation
- Providing further advice following completion
Again, being able to call 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, whilst also ensuring momentum is maintained.
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 both the seller and 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 timeframe of 3-6+ 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!
Exit planning should be an integral part of any business owners’ strategy, even for those that simply wish to keep their options open. If you’re currently thinking about planning your exit strategy or wish to discuss plans to sell your business, 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 what your options might be.Get in touch Back to top