Sell a business in the UK

In this article we take an in-depth look at what it takes to sell a business, what makes a great business to sell, and how you connect with the right buyer for your cherished business. A business can mean so much more than just money to the owner. Genuine business owners want their business to fall into genuine people’s hands.

Many of us have spent a lifetime building our business and really want to make a sale that sees the business go forward as well as existing clients properly looked after. In this article I’ll go through all of the pitfalls that you could possibly imagine and ways in which you can maximise the value of your business prior to sale.

I apologise in advance for it being such a long read but being something as serious as your life’s work you can’t really put a price on this invaluable 15 or 20 minute read. I absolutely promise the information in this article will be of value and well worth the time invested in reading it if you’re looking to sell a business

Table of contents:

Selling a business: What gets buyers excited?
When is the right time to sell a business?
Why solicitors are a ‘must have’ when buying a business.
Mistakes to avoid when selling your business
Selling a business: What turns buyers off?
Legal aspects relating to the business sale process.

Selling a business: What gets buyers excited?

Before we get to grips with what get’s buyers excited, it’s worth pointing out that not all buyers are created equally. Business buyers in my experience come in two flavours, milkers and builders. They have different objectives when it comes to buying a business and knowing which one is more likely to buy your business is critical to planning your sales pitch. So let me first explain the difference between milkers and builders.
Milkers want a cash cow, something that will deliver a certain level of income or degree of return on investment.

They normally have an exact figure in mind and are working towards buying something that will generate that magic number. On the risk scale they tend to gravitate towards the less risky end.
Builders on the other hand are looking for something they can build up, something that’s not quite the finished article and has room for them to stamp their mark on. They are normally more active business owners and tend to position themselves a bit further along the risk scale towards the riskier end.

Ok so now you have an idea of the types of buyers, what gets them excited? Well there are many factors that appeal to both groups but these factors have varying degrees of importance to each buyer type as follows:

Extensive Financial Statements – All potential buyers will want to see the financial statements for as many years as possible to assess how reliable the income is, what the cash flow position is, what the businesses expenses are, potential problems and possible opportunities that may exist. It’s milkers who value this information the most though. They normally prioritise these numbers over everything else. Builders will also be looking at the numbers but that’s not the whole picture for them. Builders are looking for opportunities.
Good return on investment – Although quite an obvious one, milkers will be more concerned with the return on investment than builders. They are looking for a positive cash flow that provides stability for them to realise their return. Builders, on the other hand, will take this into account but they are also focusing on what the business might be worth in future.
Management team – An experienced, competent management team is essential for buyers who prefer a role that involves overseeing as opposed to being hands on with every aspect of the business. Buyers that are builders prefer a more informal structure that allows them to exercise control over most aspects, allowing them to get their hands dirty. On a whole businesses that are dependent on their owners do tend to be less attractive because of the reliance on the owners relationship with customers and vendors. People buy from people as the saying goes; you want to make sure that the correct people remain behind when you sell the business.
Opportunity to grow quickly. – Now we’re getting into the domain of the builder buyer who’s looking for an opportunity to make the business bigger and better, and thereby realise a handsome return. Remember to keep it real though. Buyers are not blind optimists, they are looking for real opportunities that they can inject energy into. Over inflated statements will only leave you looking like a bad car salesmen and this will probably lead to the buyer losing interest.

Exciting brand and product lines. – Businesses that have an exciting brand or have a collection of products or services in a fast growing sector are normally favoured by builders. They want to tap into this potential and are prepared to take a few risks to position themselves on an aggressive growth trajectory.
So identify what type of buyer your business is likely to attract. If you’ve been around for ages and you think stability is your strength then trumpet that, make sure the buyer knows what he’s getting. If on the other hand your business is still young or is still growing, then make sure you emphasise the real areas of opportunity that are available to the buyer. Painting a picture of the future in the buyers mind is likely to get them more excited and generate more interest.

When is the right time to sell a business?

Running a business can be a thankless undertaking, often requiring long hours and excessive stress levels as the daily norm. I know because I have firsthand experience at it.

But why do it then? Some do it because they love what they do, others have been doing for so long they don’t know what else they would do, and some just love the fact that they don’t have to answer to a boss.
I can identify with some of these points, but one of the reasons I do what I do is that one day I will be able to sell my hard earned business for a tidy amount and ride off into the sunset like some character out of a Clint Eastwood movie.

That’s where timing comes in. Timing the sale of my business correctly means more money in my pocket. I’ve spent years building my business as I’m sure you have too and I want what I’m owed (hmm that sounds like a line out a Clint Eastwood movie already). The more I get from the sale, the more options I have and surely that can only be a good thing.

So what’s the right time to sell then?

The most common response to this question is to sell when the market is growing and there is some room for the buyer to make a profit too.

Now I don’t know about you but I’ve got a business to run here and don’t have time to do an in depth analysis of my market and then dissect the information to arrive at the ideal selling date.
I also have yet to find a service that works similar to a hotel wake-up call, something like “Good morning Mr. Withers, this is your wake up call. We anticipate another 5 years of exceptional growth. Good bye.” Hmm I wonder if there is a business idea there.

So how do I know how healthy my sector is?

Other than rising sales here are three great ways to know when your industry is in good health
Firstly, I recommend keeping your ear highly tuned to your industry, read trade publications and find out, in passing conversation, from your suppliers and customers what they think will happen next. Everything you pick up, when taken with a pinch of salt, will help you build a better picture of your industry. This reservoir of knowledge will give you an unrivalled gut feel about your sector. So invest an hour a week to research your industry further.

Secondly, rising margins and new products or services to your sector are sure signs that things are on the up and good profits are to be anticipated. Buyers are looking for good prospects to invest in.
And thirdly, finding finance is easier and investors are actively looking to invest in your sector.

Conclusion to the right time to sell a business

Picking the right time to sell comes from a deep understanding of your industry and trading environment, so put some information gathering procedures in place and start listening. Knowledge is power after all.
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Why solicitors are a ‘must have’ when buying a business.

It seems quite obvious really. Handing over large sums of money for a business you’re not 100% familiar with. Surely you need some legal representation to look out for your interests? We certainly think so and that’s why we put together this refresher post to show why solicitors are a ‘must have’ for buyers and indeed all parties involved in the sale and purchase of a business.

If you’re buying a business and you’re thinking of going it alone, take a look at the following points to see just how valuable a solicitor can be during the business purchase process:

Share/Asset Sale

There are two main methods for structuring the sale of a business. The Asset Sale, which involves you selling the assets of your business to another business or person. And the Share Sale which involves you selling shares in your business to the new owner.

Each method has its pros and cons and we recommend that you seek legal advice, along with tax planning advice, to see how the proposed deal structure might affect you and your circumstances.

Review Lease

If you’re buying a business that leases its premises, be sure to have the lease checked out to familiarise yourself with both the terms of the agreement, and what your responsibilities to the landlord are.
A solicitor will be able to guide you through the terms of the lease, pointing out areas of concern and offering guidance to uphold your best interests. If the Landlord has agreed to assign the lease over to you, your solicitor can help you prepare the required documentation to ensure a smooth transition. If a new lease is to be signed, solicitors can assist you during this process too.

Heads of terms

When the basic terms of the sale have been agreed in principle, a Heads of terms will need to be drafted to outline the agreed terms of the deal. This is often referred to as a ‘roadmap’ for the sale and is normally not legally binding but helps to clarify the terms of the proposed deal.

Your solicitor should be called upon to review the Heads of terms to ensure your requirements have indeed been met and that the terms contained are in your best interests.

Negotiating a period of exclusivity

It’s not uncommon for buyers to request a period of exclusivity in which to complete the deal with the seller. Your solicitor can negotiate this period with the seller or their agents to ensure you can complete the deal without disruption or distraction.

Due diligence.

Once a deal has been agreed in principle, you will then be allowed to access the business’s sensitive information to assess whether it has been accurately reported to you in prior stages of negotiation.
A solicitor will be able to review contracts of all types including sales contracts, staff contracts and contracts with suppliers to ensure they are favourable and do not leave you exposed to future potential losses.

Purchase Agreement

Once due diligence has been undertaken, you are normally required to submit the first draft of a purchase agreement for the seller’s consideration. The seller will most certainly be using an experienced solicitor to handle the sale process on their behalf and that solicitor will seek to extract the most gain for their client.
If you choose not to employ a solicitor, you could be at a disadvantage when it comes to protecting your interests. You may not be familiar with the legal implications of the agreement and this could leave you exposed to future loses that would diminish the value of your investment.

Warranties and Indemnities

You, as the buyer, can request that certain promises be made in the form of warranties and indemnities. A good solicitor will be able to help draft meaningful warranties that the seller must sign to help protect your investment from misrepresentation.

If, at a later date, these promises are not realised, you could then take legal action to recover a chunk of the sale price.

After Sale Restrictions

Most buyers will look to have legal restrictions placed on the seller to prevent them from competing with the newly purchased business after the sale has been completed. You’ll also want to restrict the seller from poaching the clients and staff that have helped to make your newly purchased business a success.
A solicitor can help you draft legal binding agreements with the seller to prevent this sort of behaviour, thereby protecting your investment even further.

So as you can see, buying a business is riddled with pitfalls that can be avoided with sound legal advice. Whatever you decide, I wish you the best of luck and prosperity.

Mistakes to avoid when selling your business

Selling a business is often the culmination of years, if not a lifetime’s work, but poor decision making during the sale process could leave you worse off or worse still, you could lose it all.

Now I know at this point there’s likely to be one or two of you reading this thinking, “Come on Ross, why did you have to go scare us with the whole ‘Loosing it all’ speech?” Yes I suppose it doesn’t happen all that often provided you have the right legal advice during the sale and you don’t get distracted by the sale process, but it has happened to others and it’s your job to make sure it doesn’t happen to you.

Here are 5 simple tips to help you avoid short changing yourself when it comes to selling your business:

1.) The most successful sales happen when they are planned.

Before advertising your business, it’s wise to start refining the aspects of your business that are likely to get buyers excited, and correct the ones that will turn buyers off. Long term planning is essential if you hope to realise the best return, as some short comings in your business may take months if not years to correct. Take a look at our previous posts to see what gets buyers excited and what turns them off.

2.) Know what it is worth.

This one sounds obvious but you’d be surprised at how many people pick a figure that’s relative to what they bought it for or what they think it’s worth. Business valuation can be tricky, so don’t rely on your own judgement alone when it comes to putting a value on your business.

On the one end of the spectrum you could end up undervaluing your business by thousands of pounds, leaving you out of pocket. On the other end of the scale you could end up chasing buyers away with an unrealistic price.

Always get a second valuation done, business transfer agents will usually conduct a valuation for free with the aim of signing you up as a client. If there’s a big difference between valuation amounts then try to find out why.

There have been instances in the past where some agent’s have overvalued a business to secure a mandate and then locked the seller in with a strict contract which requires an upfront payment or monthly fee. Avoid this at all costs because the agent’s incentive disappears when they know they get paid regardless of whether they make a sale or not.

3.) Find the right representatives.

If you do decide to use a business transfer agent, try to avoid agents who are not based in your area. It’s unlikely they will have a handle on the finer details that may influence your businesses value and conducting viewing when based miles away does not sound like a recipe for success.

Avoid unrealistic monthly fees and contracts that tie you in for months. I’m not saying these agents don’t deliver results, I’m just saying that commission only agents have more incentive to find you a buyer.
One great way to identify whether your chosen agent is as good as they say they are is to use Google. Type the agents name plus the word “Review” or “Complaints” or something similar and see what other are saying about the agent.

4.) Say it like it is.

One big mistake to make is to provide inaccurate facts and figures to the potential buyer. Many sellers are emotionally attached to their businesses and figures are sometimes embellished to paint a better picture of the business. Often this is not out dishonestly, but rather subjective perspective.

If you are found to be inaccurate on any of your facts and figures, you could undermine the buyers confidence in your ability to provide accurate information and the whole deal could fall apart. Even if you do manage to retain the buyer’s interest, it’s unlikely that you’ll be in any position to negotiate when the buyer starts asking you to reduce your price because of misleading facts and figures. Say it like it is.

5.) Choose the right buyer.

I know, the temptation of taking the first or the highest offer is almost impossible to resist but despite first impressions this offer may not be the best one for you. Higher offers often have strings attached and in some cases buyers are looking to you for some form of seller finance or guarantees. Beware! You don’t know the buyer from a bar of soap. He could be a bad leader or difficult to get on with. If that is the case your customers will waive you goodbye and your talented staff will have made a dash for the exit long before you have chance to pick up the pieces.

When it comes to accepting an offer, don’t forget that businesses can take as much as 2 years to sell. Remember, being patient when selling a business is a very profitable virtue.

Selling a business: What turns buyers off?

A few weeks ago I raised a number of points about the factors that get business buyers excited when it comes to buying a business. This week I decided to show the other side of the coin and highlight a few points that turn buyers off. Hopefully I can give you some food for thought before you advertise the sale of your business and help you keep more buyers interested in what you have to offer.

If you read my last post you’ll remember that we divided buyers into two groups: Milkers and Builders. At this point some of you may be scratching your head asking “What is he on about?”, so here is a recap from my post a few weeks ago.

Builders buy businesses because they want to stamp their mark on the business and are after opportunities that represent growth potential. Milkers on the other hand are looking to purchase a business that generates a desired level of income and factors like stability and predictability take precedence over other attributes like growth potential and risk.

So now that you’re up to speed let’s dive straight into the factors that turn buyers off:
Declining sales – Many businesses suffer declining sales at some point during the business cycle. Many recover but some don’t and buyers of all types are unlikely to board a sinking ship. That’s not to say you won’t sell the business, you’re just likely to get less for it in the end because you’re not in a very good position to negotiate.

Rising expenses – Although not necessarily a negative indicator on its own, combining rising expenses with stagnant or declining sales is sure to turn buyers off. If it means holding out for a further 6-12 months while to make a few adjustments to improve the businesses trajectory, do it! You may be able to get more for the business in the end.

Owner dependence – Owner dependence is one negative aspect often overlooked when selling a business. Firstly, how much of your existing turnover is reliant on your personal relationship with clients? Will they just follow you out the door when the new owner takes over? Whether the buyer admits it to you or not, I can guarantee they are thinking about this. Secondly, is your business able to operate without your constant presence? If it can’t then surely it would make more sense for the buyer to work a job for the income instead of take a risk buying your business? Minimise your business’s dependence on you and watch its value increase accordingly.

Non-diverse customer base – Buyers are looking to minimise risk when buying a business. Buying a business with a small number of clients increases the risk that one lost client could have a dramatic impact on your turnover. Diversify your client base to make your business more attractive.

Indifferent staff – The potential buyer will meet your staff at some point before the sale of your business is concluded and they will make a judgement based on that introduction, and any subsequent contact with your staff. Solve staffing issues like lack of moral, training and appearance before selling your business. The buyer will notice if something isn’t quite up to scratch. Builders will see this as an opportunity, milkers will see this as a threat, but both will seek a discount on your selling price to justify the risk.

It’s worth pointing out that even if your business is guilty of all points raised above, you can still sell it. The downside is you’ll probably end up having to sell it for considerably less, only for some enthusiastic buyer to swoop in correct your mistakes and benefit from the groundwork you put in prior to selling the business. So I’d recommend implementing a plan to address the points raised above, before advertising your business. If you don’t end up selling, at least your business will be in tip top shape.

Legal aspects relating to the business sale process.

Buying a business is an exhilarating and potentially life-changing experience and the law affects the whole process. Understanding the legal issues will help you achieve a smooth sale and future success for your business. Here we summarise the legal process and some of the main points to consider.

Negotiations

When you express an interest in buying a business the seller may give you a pack (sales memorandum) with key information like the business assets, finances, operations and future projections. They might ask you to sign a confidentiality agreement to prevent staff, clients and rival business finding out they are selling the business. You might then make an “indicative offer” – a non-binding agreement subject to ongoing negotiations and checks.

You (normally through a legal adviser) will make ‘due diligence’ checks. The purpose of this is to make sure the business it what it seems to be and avoid unpleasant surprises. Typically, it involves reviewing financial documents, the business rental agreement and contracts with staff and clients; and evidence of the seller’s ownership of the business. While this takes place it is likely that you will continue to negotiate with the seller regarding things like the price, assets included in the purchase, and the guarantees they will commit to regarding state of the business.

Once these processes are complete you and the seller will sign the final agreement for the sale of the business.

Structuring the sale

You can purchase a business either as a share sale or an asset sale.
A share sale means that ownership of the entire business – the company, assets, staff and so on – is transferred from the previous owners to you. With an asset sale on the other hand, you purchase specific parts of the business such as the premises, stock, and intellectual assets like the name.

Share sales can be attractive in some cases – you might value business continuity and not want to tinker with a ‘magic formula’. On the other hand it does mean that you take on the liabilities of the business, such as unpaid bills and legal claims against it. The best option depends on your circumstances, and there are other issues – such as tax – that come into play.

Financing a new business

Unless you have enough cash for the purchase price, you will probably need to seek financial assistance either as a straightforward loan or in exchange for shares in the business.
If you can find willing investors this can be an attractive option as it reduces the financial burden on you and your business. On the other hand, you will need to accept that your control of the business and share of the profits is reduced.

The legal issues surrounding business purchases can be confusing and intimidating, especially for those involved in the process for the first time. Commercial solicitors will help ensure the legal side of the sale is watertight and works in your best interests.