How to Prepare Your Business For Sale

Selling your business is a major milestone, and whether you’re looking for a fresh start or planning your retirement, preparing your business for sale is critical to getting the best possible price. If you’re an individual or business owner in the UK thinking about selling, here’s an exciting step-by-step guide to help you navigate the process, from preparing your business to closing the deal!

1. Why Sell?

Understanding why you want to sell is crucial to the process. Your motivation will influence your exit strategy and the timing of the sale. Some common reasons include:

Retirement;
New ventures;
Health issues; and/or
A desire to cash out after years of hard work.

No matter the reason, having a clear purpose will keep your journey focused and help potential buyers understand the value of your business.

2. Getting Your Business in Shape

Before you list your business for sale, it’s essential to make it as attractive as possible to potential buyers. Here are some key steps:

Financial Clean-Up: Ensure your books are in order and reflect a profitable, stable business. Make sure you have up-to-date accounts, tax records, and clear financial projections. Strong cash flow and profits are always appealing to buyers.
Streamlining Operations: Buyers are attracted to businesses that can run smoothly without heavy reliance on the current owner. Delegate responsibilities, automate processes where possible, and tighten up any inefficiencies.
Customer Base: A loyal and diverse customer base is a huge asset. Show buyers that your business has a strong, repeatable revenue stream by nurturing your client relationships.
Contracts & Agreements: Make sure all contracts with suppliers, customers, and employees are formalised and up to date. This adds security for a buyer and avoids any legal headaches.
Brand & Marketing: Strengthen your business’s presence with effective branding and marketing strategies. Consistent branding and a solid online reputation can make your business stand out.

3. Valuation Techniques

The value of your business is one of the most important factors in the selling process. Several valuation techniques can help determine a fair asking price:

Asset-Based Valuation: This method involves valuing your business based on its assets and liabilities. It’s ideal for companies with significant tangible assets, like manufacturing businesses.
Income-Based Valuation: Common for service-oriented businesses, this method values the business based on projected future earnings, often using metrics like EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation).
Market-Based Valuation: Here, your business is valued based on the sale prices of similar businesses within your industry. This comparison can give you a ballpark figure of what buyers might be willing to pay.

As the old saying goes, “something is worth what someone is willing to pay for it”, but valuation techniques can help facilitate any conversation between a buyer and seller. There are often long-established valuation techniques which are well-established in specific industries.

4. Selling Options

There are several routes you can take when selling your business, each with its own pros and cons.

Direct Sale to a Buyer:
- Pros: Can maximise sale price, offers flexibility in negotiations.
- Cons: May take time to find the right buyer, often requires significant preparation.
Management Buyout (MBO):
- Pros: Management already knows the business, ensures continuity.
- Cons: May offer a lower price than external buyers, could be complex to arrange.
Selling to a Competitor:
- Pros: Competitors may pay a premium to eliminate competition or expand.
- Cons: Can lead to employee or customer apprehension if sold to a rival.
Selling to a Private Equity Firm:
- Pros: Typically offers higher valuations for growth potential, more resources for expansion.
- Cons: Involves loss of control and can be a lengthy process.
Merger or Acquisition:
- Pros: Can unlock synergies, often results in a higher valuation.
- Cons: May complicate existing business operations, possible cultural clashes.

5. What Buyers Look For

Buyers will evaluate your business’s attractiveness through several lenses, including:

Profitability and Growth Potential: Is your business scalable?
Industry Trends: Does your industry have a bright future, or is it in decline?
Strong Leadership and Staff: A well-run business with competent employees is more attractive.
Reputation: A positive public perception and strong brand can set your business apart.

6. Preparing for Due Diligence

Once you’ve found a buyer, due diligence begins. This is where the buyer will scrutinise every aspect of your business to ensure they’re getting what they’re paying for. Be prepared with:

Financial documents: Up-to-date profit and loss statements, balance sheets, and tax returns.
Legal documents: Contracts, intellectual property rights, lease agreements, etc.
Employee information: Organisational chart, key staff, employment contracts.
Operational manuals: Documenting day-to-day processes makes transition easier.

7. Closing the Deal

Once due diligence is complete, it’s time to finalise the sale. At this stage, ensure you have a great legal advisor to review the sale agreement and handle negotiations (if you don’t already have one, we’d be delighted to put you in touch with one!).

A smooth handover plan will help facilitate the buyer’s transition, ensuring your business continues to thrive under new ownership.

Even after the deal is concluded, it can be very hard for seller to let go of their “legacy”, so it can be important to proactively discuss next steps or other projects which might be of interest.

Potential drawbacks of selling your business

Selling your business is a big decision, and while it can offer financial rewards and personal freedom, there are some potential disadvantages to consider. Here’s a look at the key downsides of selling your business:

1. Loss of Control

When you sell your business, you’re relinquishing control. For many owners, their business is not just a source of income but a passion project built over many years. After the sale, decisions regarding the business direction, operations, and staff will be in the hands of the new owner. This loss of control can be emotionally challenging, especially if the buyer takes the business in a direction that you don’t agree with.

2. Emotional Attachment

A deep emotional connection to the business can make it difficult to let go. Many owners find it hard to separate their identity from the company they’ve built, leading to second-guessing or regret after the sale. The emotional toll of selling can sometimes overshadow the financial rewards, especially if the buyer does not share your vision or values.

3. Tax Implications

Selling your business can result in significant tax liabilities, especially if the sale includes a capital gains tax on the profit made from the sale. In the UK, business owners can benefit from schemes like Business Asset Disposal Relief (formerly Entrepreneur’s Relief), which reduces capital gains tax to 10%, but there may still be substantial tax to pay, depending on the sale price and your tax situation. It’s essential to plan ahead with a tax advisor to minimise the tax burden.

4. Financial Risk in Payment Structures

Not all business sales are cash deals. In some cases, buyers may propose a payment structure involving instalments or earn-outs, where future payments depend on the business’s performance after the sale. This creates financial risk for the seller, as future payments may not materialise if the buyer fails to meet performance targets or encounters financial issues. You may also need to remain involved in the business for some time during the transition period, which could delay your plans for a complete exit.

5. Impact on Employees

Selling the business can create uncertainty for employees, especially if the buyer plans to make significant changes to operations or staffing. Long-standing employees may feel unsettled or face layoffs, and you may feel responsible for their future, creating guilt or concern about the well-being of your team after the sale.

6. Potential Drop in Value

If your business is highly dependent on you, the owner, for its day-to-day operations, its value may drop once you step away. Buyers might see your exit as a risk and adjust their offer accordingly. This can be particularly true for small businesses where personal relationships with customers, suppliers, or employees are a key factor in the company’s success.

7. Lengthy Sale Process

Selling a business can take time, sometimes years, depending on the size and complexity of the company and market conditions. The process involves preparing the business for sale, finding the right buyer, negotiating terms, and going through due diligence. During this time, your attention may be divided between running the business and managing the sale process, potentially leading to a decline in business performance.

8. Post-Sale Non-Compete Restrictions

Buyers often require non-compete agreements as part of the sale, restricting you from starting or running a similar business in the same industry for a specified period. This can limit your future business opportunities if you’re considering staying in the same sector after the sale.

9. Reduced Income Potential

While the sale may result in a lump sum payout, it’s possible that your ongoing income from the business could have been higher if you continued running it. Especially if your business is growing, you may be leaving future profits on the table by selling too early. Additionally, if you sell during a downturn or unfavourable market conditions, you may not get the full value of your business.

10. Challenges of Life After Sale

For many business owners, the question of “what’s next?” looms large after selling. Transitioning into a new career or retirement can be challenging, especially if your identity has been closely tied to your business for years. The change can lead to a sense of loss, boredom, or dissatisfaction if you haven’t planned for life after the sale.

Selling your business can be a rewarding and life-changing event, but it’s not without its drawbacks. Being aware of these disadvantages and planning for them can help you make a more informed decision. Careful consideration, along with professional advice from accountants, financial planners, and legal experts, can ensure that your sale benefits you both financially and personally in the long term.

Conclusion: Don’t Go It Alone

Selling your business is one of the biggest financial decisions you’ll make, so don’t hesitate to seek professional help. Whether it’s business valuation, due diligence support, or legal advice, an experienced accountant or advisor can guide you through the complexities of the process.

Remember, the better prepared your business is, the more appealing it will be to buyers. And, with the right steps and planning, you can walk away with the financial reward your hard work deserves.

Find yourself in this position, we’d love to talk to you today to understand more about you, your business and how we can potentially support you during this process.