Selling a business you have started and run for many years can be an emotional experience: you are likely to have put in many thousands of hours of hard work into building it up and selling it will be a wrench. That makes it absolutely essential that the sales process is carefully planned and managed to ensure that the transition is smooth, the proceeds are maximised – and that you know what you want to do with the proceeds.
Nick Brown sold his company in 2004 for a seven-figure sum and now runs Corporate Exit, a consultancy that helps business owners plan the eventual sale of their company. He also appears on The Jeremy Vine Show on BBC Radio 2 as the programme's Business Expert. He says: “The first thing to flag up is that selling your company doesn’t just happen. It takes thorough planning, often over several years. Selling your company really is all about planning. Always think of the end game.”
It is something that many small business owners will do only once, when they retire – although James Alder, divisional director of financial planning at Brewin Dolphin in London, says a growing number of younger entrepreneurs aim to build a business to sell it on and start again. Whatever stage of life you are at, however, the key is to ensure that both you, and the business, are ready for the process.
Steps to sale
The Institute of Chartered Accountants in England & Wales has a useful Directors’ Guide to selling a business1, which sets out the key steps which are needed, starting with the decision to sell and proceeding through preparing a sales memorandum, marketing the business, weighing up the offers and completing the deal. A key piece of advice is to decide the price you require and to reject offers below that. “Setting and holding out for a high price usually pays off. Potential buyers will gain an impression of genuine self-confidence,” the guide says.
That means being realistic about the company’s merits, says Alder. “A lot of business sales do not go through because they have not been valued properly.” He says there are a number of valuation formulae and “if management use a different formula to the buyer, there may be a gap between the figures.”
He suggests sellers first establish what he calls their ‘lifestyle number’. “What sum do you need to achieve to enable you to retire, for example, and to maintain the lifestyle which you require in retirement?” Then, sellers should assess the value of the business and consider the tax consequences of a sale – will the sale qualify for entrepreneurs’ tax relief, which means gains would be taxed at 10%2, rather than 20%3, if certain ownership and business structure conditions are met?
The right people
“It is very important early on to have the right people dealing with the corporate finance issues. Rest assured the buyer will know exactly how they value the business.”
Once a successful sale is achieved, the seller needs to decide what to do with the proceeds. The fact that a maximum of £75,000 in deposits per bank qualify for protection4 under the deposit guarantee scheme means that the initial sums may have to be split between a number of banks or, says Alder, sellers can use National Savings Income Bonds, which have protection for deposits of up to £1 million5. “For the long-term, sellers then need to consider whether they want the proceeds to generate income or whether the priority is growth. If the sale produced a large capital gains tax bill, do they need to think about a scheme to help offset that bill?”
He adds that there may also be a need for advice on inheritance tax, pensions and life assurance as all of these can be affected by a sale of the business.
The value of investments can fall and you may get back less than you invested.
Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.
The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.