7 important things to consider when selling your business

If you are considering all your financial options when it comes to the future of your business, and are even thinking about the benefits of selling it either now or in a few years, you’re not alone.

In fact, Small Business reported that UK entrepreneurs made over £11.8 billion by selling their businesses between 2020 and 2021.

While it might be tempting to sell up to raise some important funds for your future, there are seven things you need to consider before you act. Read on to find out what they are and how to best prepare for the future of your business.

1. You need to obtain a valuation of your business

Before you act, it is imperative that you find out exactly how much you could gain from selling your business. While there are many different methods that can be used to calculate your business’s true worth, two of the most common methods are:

• Comparable analysis
• Price/earnings ratio

The comparable analysis method involves assessing and comparing the value of businesses similar to yours. This will give you a great idea of the value of your own business based on what similar companies are currently worth.

An alternative is to use another valuation method: the price/earnings ratio.

The price/earnings ratio will, in general terms, determine the value by the profits your business makes. Your ratio might be anywhere between one and 10, depending on your business and its growth projections.

For example, using a ratio of five for a company that makes £200,000 in post-tax earnings implies it would be valued at £1 million.

How you arrive at the correct number for your price/earnings ratio will differ significantly from business to business. For example, tech startups and B2B companies often have high ratios because they’re generally high-growth companies.

2. Work out how much money you need to live the life you want

When you’re looking to sell your business, it can be instructive to establish just how much money you will need to do everything you want to do in the future. That’s when talking to a financial planner can add real value.

A financial planner will help you to work out how much is “enough” for you to live your desired lifestyle and to meet all your life goals. Armed with this knowledge, you can make more informed decisions when you receive offers for your business.

Here’s an example. You work with a planner and establish that a sale price of £1 million would ensure you could retire and do everything you want to with the next phase of your life.

When you receive an offer for this amount, you could agree to sell, safe in the knowledge that it will provide “enough” for you.

Without this information, you may reject offers and spend years more working in your business simply to achieve a higher sale price you didn’t necessarily need.

3. Timing is key

Finding the most optimal time to sell your business is paramount. Make sure that you consider the current economic climate and how it might change in the coming months or years.

One of the most important things to consider is how successful the business is at the point at which you want to sell it. If the business is profitable, it will be more desirable in the eyes of potential buyers and be worth more to you as a result.

It’s also incredibly important to make sure that you’re selling at the most suitable time for your circumstances. While the desire to make money quickly is strong, it’s not worth rushing the sale just for the sake of it when, with due diligence and planning, you could sell your business at a far more opportune moment and potentially earn yourself more money.

4. You need to consider what your future role in the business would be

There are some occasions when selling your business but staying on in some capacity is the most optimal solution for you financially, so work out whether a partial or full buyout is best for you.

Even if you sell your entire share in the company, the buyer may want you to stay on for a period to ease the handover.

It’s well worth considering whether you need all the money from a full buyout now or whether it would work out better for you in the long term to keep receiving funds as part of the ownership structure.

5. Think about who you’re passing the business on to

As you’ve worked hard to develop and expand your business over the years, you might well want to keep the business in the family.

When passing your business on to family, you need to consider whether you want to retain any investment in the business, how ownership of the business will be shared between yourself, your partner, and your children, and who will manage the business.

There is also the option of selling your business to one of your employees. When doing so, it’s important to consider whether it’s viable for them financially and think about the potential financial ramifications for your business in the future too.

It’s also possible to sell your business to a group of your employees, through an employee ownership sale. This will see the company shares sold to a trust, which holds them for the benefit of your employees.

One of the advantages of selling your company to employees is that it you could avoid Capital Gains Tax (CGT), provided that more than 51% of the shares are being sold.

6. Consider future taxes like Capital Gains Tax

When selling or transferring assets in the form of the share of capital of your business, it’s important that you are aware of the impact that CGT can have. You’ll typically pay tax on any gains made from selling the business, compared to what you paid for it.

You don’t usually have to pay tax on businesses gifted to husbands, wives, or civil partners.

You can also offset the amount of tax paid by using Business Asset Disposal Relief, which will see you pay tax at 10% on all gains on qualifying assets, up to a £1 million lifetime limit for relief. To qualify for this relief, you must be a sole trader or business partner and have owned the business for at least two years.

7. Note any potential risks

When looking to sell your business, it’s also incredibly important that you are aware of any potential risks to yourself and your business.

For instance, do you have any outstanding debts from customers? Are there any current claims from employees that could pose problems for the sale? Any issues or ongoing claims like these need to be fully dealt with before progressing with the sale.

Get in touch

If you are considering selling your business, and you want to know what impact this would have on your personal finances now and in the future, speak to our financial planners.

Please email info@harperlees.co.uk or call 01277 350560.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.