If you are contemplating selling a business for the first time there is often a tendency to think that your business is completely unique and for that reason the sales process will also be unique.
However, while the business and the personal circumstances of the owners may be very individual, the overall process of selling a business usually follows a fairly standard structure. The following gives a broad outline of that structure.
The Sales Memorandum
Before the business sale can begin the seller will need to produce a Sales Memorandum. This is an executive overview of the business: what the business does, sales and profitability and why it would make a good investment.
Detail is also required on the type of sales made and the size of customer base as well as numbers of employees. The potential purchaser will also need to know in summary what is planned in terms of handover / exit.
The split between the asset value and goodwill with the business should also be outlined, so that the purchaser can make a judgement on the value of the goodwill in relation to the purchase overall. This goodwill figure will of course have to be justified.
This is very much a sales document that has to put the business in the best possible light, but it also has to be honest and true. For example, if the business trades almost a 100% with a single customer, it is better to be up front about this at the outset. Surprises being sprung on the purchaser in the course of the sales process often have a tendency to stop the sale.
Finally, it is an executive summary, so it needs to be short and to the point – ideally just a single a page.
Confidentiality & Disclosure
There is no need at the outset for the seller to disclose either their name, or the name of the business they are selling. However, at some point, more detail will be required by a potential purchaser and it is at that point the business seller needs to firm up on confidentiality and this takes a number of forms.
Firstly, is the obvious provision of a confidentiality agreement that the potential purchaser must sign. This must come with strings attached as follows.
Secondly, the seller will also have to request proof of identity, the name of an appointed solicitor and ideally some indication that funds, or backing, does exist in some form to take the purchase forward. This is enough to deter the less serious enquirers, but also provides some assurance that a confidentiality agreement will be adhered to.
Thirdly, at a later more detailed stage in the process, references should be requested for the purchaser. These could be from a solicitor, a bank, an accountant or even a business associate. As with all references, it is advisable to double check telephone numbers and other contact details to rule out any possibility of fraud. Again, as with all references, a verbal enquiry works better than a written one as the person giving the reference is more likely to give a more direct and honest answer.
Dealing With Potential Purchasers
When dealing with the purchaser, it is always worth considering their viewpoint. If you are selling, consider what you would like to know if you were purchasing. This may make you more sympathetic to some of the more probing questions you may have to face.
Some purchasers may not like stringent confidentiality procedures and the seller requesting references. This is of course the reason why such things are needed – to rule out early the less than serious enquirer, or those with just a bit too much to hide.
However keen the seller may be to sell, it is better to just walk away from a potential purchaser who is unwilling to commit to confidentiality, or reference checking provisions.
Providing confidentiality can be assured, then it is best if the first meeting can be held at the premises of the business being sold.
It should be held out of hours to avoid scaring the staff and remove the risk of the purchaser being recognised.
It is worthwhile taking the trouble to ask for additional security information such as photo ID (e.g. a passport), especially if valuable stock is held within the premises.
Good meeting practice should be applied with a broad agenda established beforehand with a target timeframe. It is also worth keeping minutes an outlining both follow on actions and next meeting dates to keep the momentum up towards the final sale.
The purchaser will want detail on the business and there is nothing more off-putting to a potential purchaser than a seller who is not on top of their figures. Even for the ‘initial’ meeting, as much detail as possible should be available to the purchaser to allow them to make a decision when they ask for it.
The seller should consider what information can be handed out to be taken away and what can be viewed only, especially at the early stages.
A serious potential purchaser will want to undertake due diligence on the business to validate any figure or assertions given. The business seller can expect this work to be extensive and intrusive with enquiries going back up to six years of trading.
It is best if this work is done off site, but there may be a requirement to be on site for some of the work at least. Electronic records and onsite database systems are good examples of where on site work may be needed. Careful supervision is required here and it will be best if the owner / seller is the supervisor.
Whilst it is reasonable to expect prospective purchasers to respond reasonably quickly at the confidentiality / initial enquiry stage, the business seller should be aware that a typical business sale may take anything between 4 and 20 months. Unless there are special external drivers such as legislation of even health issues, it is unlikely that a purchaser will hurry through the process without some sort of incentive (e.g. a sales price drop).
However, the process does need to be managed and delays caused by solicitors in particular, can be especially annoying as they will get paid whether the sale happens or not.
Over an extensive period that can last up to, or beyond, 20 months, the costs can mount up and the view of the business originally held by both the seller and the purchaser can be significantly altered by the due diligence process. Unsurprisingly, the final price paid by the purchaser is often not the original one agreed at the outset.
Re-valuations are therefore an inevitable part of the overall sales process and the seller needs to be realistic about the their own expectations and pragmatic in terms of establishing a final pricing package that works for both parties.
The final offer that is agreed upon will not be like selling a house. Both the seller and the buyer have practical and technical needs as well as the obvious financial ones. When these needs are coupled with the financial costs associated with the sale and the need for the sale to be as tax efficient as possible, then the final offer can be really quite complex.
For example, technical and or commercial expertise may be required from the seller for an interim (handover) period and this may require the seller working for a restricted time in a paid consultancy role. The consultancy fee may therefore form part of the overall price paid.
Tax considerations can be particularly fraught and, while tax will undoubtedly have to be paid, it obviously makes sense to minimise the overall liability if at all possible.
Final Word on Selling a Business
If any of the above makes selling a business sound difficult, bear in mind this is just a brief overview – the detail is much worse.
In fact both selling and buying a business is a mine field for both parties involved. It is for this reason that A2Z Business Brokers offers a support and consultancy service to make the overall process as trouble free as possible. Just putting the expert advice aside, it is always useful to have a third party arbitrator on hand to assist with negotiations to help to move things on quickly.
If you would like more information about selling a business, then please contact us for a free, no obligation, initial consultation.
Capital Gains tax rates can be found on the HMRC website here:
Additional information on working out the overall liability can be found here: