Selling your business

Whether you're seeking to sell your business in order to retire, or want to use the capital released to build another business, the process can be a stressful and complicated affair.

Developing an effective exit strategy requires meticulous planning to achieve the highest possible valuation and identify an appropriate buyer for the takeover.

But don't worry, as guidance is available from brokers and specialists in mergers and acquisitions (M&A) transactions.

As with all financial transactions, it’s a good idea to seek independent expert advice to understand what course of action is best for you and your business.

Read on to find out what you need to think about when selling your business.

Reasons for a sale

Any potential buyer will certainly want to know why you are selling your business.

It's common for an owner to sell a business for one of more of the following reasons:

• Retirement
• Illness
• Board-level disputes
• A need to raise capital.

While some owners will consider selling a business that's unprofitable, this is likely to make a sale more difficult.

Selling your business might be easier if you can show evidence of:

• increasing profits
• increasing turnover
• strong cashflows
• a wide and growing customer base
• good visibility on forward contracts.

Timing of a sale

Preparing your business for sale helps in giving you the best possible chance of getting a higher price for your business.

This will include planning the right exit route beforehand.

It may be that now isn't the best time to sell your business and you may need to wait to obtain what you would consider a realistic price.

Before you begin the process of selling, you can consult other business owners on their thoughts, as well as asking brokers and corporate finance experts for their advice.

Possible exit options

There are several possible exit routes, including:

• a trade sale
• a full or partial sale to private equity investors
• a sale to a family office or high net worth individual
• a flotation on the stock market
• refinancing
• setting up an employee ownership trust
• a joint venture.

A trade sale

According to Peter Gary and Andrew Jeffs, partners at Cavendish Corporate Finance (part of the FinnCap group) and authors of 'The Definitive Guide to Selling Your Business', a trade sale:

...offers the greatest prospect of 100% cash-out and the opportunity for you to leave the business, particularly if the trade buyer is a competitor and will absorb your company into its existing organisation.

Gary and Jeffs also state that another feature of a trade sale is that the due diligence process is typically less onerous compared to a private equity transaction.

Private equity

A transaction with a private equity house will often involve a partial sale, as management shareholders will typically be asked to reinvest a proportion of their sale proceeds into the acquiring company.

According to Peter Gary and Andrew Jeffs, a private equity transaction:

suits an owner manager who wants to de-risk his wealth position by taking some money out but would like further investment to expand aggressively (organically or through acquisition) in order to build a much larger and more valuable business.

Learn more about private equity.

Family office or high net worth individual

This is similar in many respects to a private equity transaction.

A flotation

A stock market flotation can be an opportunity for a business owner to achieve a full or partial exit.

In bull markets (financial markets in which prices are rising or expected to rise), there may be the opportunity to achieve a higher valuation than via a trade sale.

Learn more about Initial Public Offerings (IPO).

Refinancing

A refinancing with bank debt is when your business takes on debt supported by the company's stream of profits, then distributes the proceeds of the refinancing to shareholders via a share buy-back.

Setting up an employee ownership trust

This is when you sell the business to your employees and an employee ownership trust (EOT) holds the shares collectively on their behalf.

Provided you meet certain rules, transferring a controlling stake in your business to an EOT can give you relief from any capital gains tax that you might otherwise have to pay.

Consequently, this can significantly increase the effective value of the sale to the outgoing shareholders.

Learn more about EOTs.

Joint venture

A joint venture is essentially a strategic partnership where two or more businesses, come together to collaborate on a specific project or to achieve certain business objectives. 

This collaboration is formalised through a commercial agreement, which outlines the goals of the venture, such as introducing a new business concept or penetrating a new market.

In a joint venture, each participant retains its own business identity and legal status, although sometimes a new entity is formed. 

This newly created entity is jointly owned by the partners but operates independently of their existing operations, serving as a bridge between the collaborating parties.

Typically, joint ventures are established with a clear end goal or for a specified duration, such as for a singular project. 

However, they can also form the basis for ongoing collaborations. 

The primary aim is to provide mutual benefits for all involved parties, enabling growth and access to new revenue streams that would not be feasible individually.

Although not technically a business sale, a joint venture can lead to other exit routes, such as a trade sale.

The Competition and Markets Authority (CMA) has guidance for businesses thinking of, or already operating, joint ventures to help them comply with competition law. 

This follows a case where two businesses in a joint venture were fined £1.7 million by the CMA for agreeing to share the market under the cover of a joint venture agreement.

The CMA’s short guide on Joint Ventures and Competition Law: dos and don’ts is for businesses that are already in, or are considering entering into, joint ventures, alliances, or other forms of collaboration with another business.

The CMA’s guidance urges competing businesses to 

• make sure they collaborate legally
• check they are compliant with competition law from the outset of agreements
• keep arrangements under regular review to help ensure they remain compliant. 

    
For guidance on avoiding anti-competitive business practices visit the Government’s Cheating or competing website.

How to know if exiting my business is viable

Before choosing your preferred exit route, you should decide whether exiting the business is even a viable prospect for you.

An exit may not be viable for a number of reasons, including the following:

• the business relies on you (as owner) or a single customer
• the business has a flawed business model due to a permanently changed market
• a setback due to conditions beyond the business' control
• holding off the sale may bring about a more reasonable valuation once you've remedied certain issues.

How to value your business

Someone acquiring a business will typically value the company in either of the following ways:

• by a multiple of normalised earnings
• discounted cashflows.

Of course, in practice these seemingly simple calculations are affected by a range of assumptions and projections.

It may make sense to seek expert advice on how to obtain the best sale price.

Learn more about how to value a business.

What are my responsibilities to my employees when selling my business?

You should inform your staff when and why you’re selling your business as well as about any redundancy terms or location packages that might be available.

During the business sale process, you must be vigilant not to breach employees’ rights as they may be protected under the Transfer of Undertakings (Protection of Employment) regulations, otherwise known as TUPE.

TUPE applies to employees of businesses in the UK, regardless of the size of the business being sold.
When TUPE applies:

• you must consult employee representatives about anything to do with the sale that would affect the employees
• the jobs of your staff will transfer over to the new business though exceptions can be made if employees are made redundant or if the business is insolvent
• the terms and conditions of employment of staff also transfer to the new business
• your staff’s employment is continuous.

What are my responsibilities to HMRC when selling my business?

If you are self-employed, you’ll need to inform HMRC that you have sold your business as it will have knock on effects regarding your tax liabilities, including:

• Self Assessment
• National Insurance
• VAT registration
• Capital Gains Tax

Remember that you must submit a Self-Assessment tax return with the date you stopped trading by the normal deadline.

Visit GOV.UK to learn more.

What are my responsibilities to the Competition and Markets Authority when selling my business?

The CMA is responsible for merger review in the UK.

The CMA is an independent non-Ministerial Government Department and is the UK’s principal competition and consumer protection authority.

When does the CMA investigate a merger?

The CMA may investigate a merger between your business and another to make sure that it will not result in a ‘substantial lessening of competition’.

A merger usually only qualifies for a CMA investigation if either:

• the business being acquired has a UK annual turnover of at least £70 million; or 
• the combined businesses have at least a 25% share of any reasonable market.

Merging businesses includes acquisitions, take-overs, and joint ventures.

Relevant mergers can be formally notified to the CMA or they can be identified and ‘called-in’ for investigation by the CMA’s mergers intelligence committee. 

Merging businesses are welcome to submit a short briefing note to the CMA, explaining why they do not propose to formally notify the transaction to the CMA.

Where the CMA has found that a merger will result in a ‘substantial lessening of competition’, the CMA may decide not to refer a merger for further in-depth investigation if it believes that the relevant market(s) are not of sufficient importance to justify further investigation. 

This is referred to as the ‘de minimis’ exception. 

For more information on the UK merger regime and the CMA’s approach when reviewing mergers you can read the CMA’s Quick guide to UK merger assessment: CMA18.