If you to receive an unexpected offer for your business that you simply couldn't refuse, would your business stand up to scrutiny from the potential buyer?
People sell their businesses for a variety of reasons, such as:
- Wanting to retire
- Struggling to find further investment
- Beginning to get into difficulties and want to get out before they increase
- An offer you can’t refuse.
If your business is not generally in good order, the last one can take you by surprise and sometimes the sale is lost as a result. It is good practice to keep your house in order, as you are then always ready for the unexpected opportunity to sell.
First, what do you sell? If you are a sole trader or a partnership, you can only sell the business. If you are a company, then you can sell the business or you can sell the shares in the company and the business goes with it.
Depending on what you are going to sell, there are points to consider in each case.
Buying the business is normally the buyer’s preferred option, because he can pick and choose what he buys and might, for instance, leave the creditors and debtors with the seller. You would normally sell the whole business as a going concern (which does give the minor advantage that there is no VAT on the transaction). However, be aware of the position on employees and TUPE (The Transfer of Engagements (Protection of Employment) Regulations); all employees will go across with their contracts intact and may well have a claim if they are dismissed or their contracts are changed as a result of the transfer.
If you are selling part of the business, you may have the option to sell assets only rather than sell as a going concern. However, if you don’t sell as a going concern the deal will be subject to VAT.
If you have a company, selling the shares is normally the seller’s preferred exit because the money comes straight to you. If the company sells the business, you still have to get the money out!
Buyers also sometimes prefer to buy the company because there is no TUPE transfer of employees. However, companies are sold “warts and all”, so due diligence will be conducted in much greater depth and the contract tends to be more detailed and require more warranties. Overall, the professional costs on the sale of a company are likely to be significantly higher.
Whatever is being sold, your house needs to be in order. There are five main areas to consider:
- Are your annual accounts up to date and in order?
- Do you actually prepare any management accounts; if so how frequently, and in what form?
- Is the financial information that backs your accounts and management accounts in some sort of order?
- Is there anything you should be doing to minimise tax on a possible sale? You may need to consult your accountant.
- Do your employees have service contracts or written statements of terms of employment? If not, you are breaking the law. If they do exist, are they up to date?
- Do you have some form of works or office manual? This is good practice if you have any significant number of employees.
- Are there any pensions arrangements? Are you obliged to comply with the auto-enrolment regulations and, if so, have you done so?
3. Land and Buildings
- Freehold: is the title registered at the Land Registry and, if not, do you know where the title deeds are?
- Leasehold: have you got your lease or tenancy agreement? How long does it have to run? What is the rent?
- Does your use of the property comply with planning and environmental regulations?
- Is any equipment in good working order, properly maintained and with a service record where appropriate?
- Do you use any patented inventions? If so, do you own the patent or have a licence to use it?
- Is your logo registered as a trademark and, if not, should it be?
- Do you protect the copyright on your own documentation and respect other peoples’ copyright?
IT is frequently crucial to the smooth operation of a business, even if you only use Microsoft Office or Sage for your accounts. Therefore, you should consider:
- Does the hardware and software work properly?
- Do you have the right software for your requirements?
- Do you have all the licences you need?
- If you have a website, is it properly maintained and up to date?
- Who holds and maintains your domain names and email addresses?
Other things you may need to consider include if you have assets on lease, lease purchase or hire purchase, and if so, can you pass the contracts on to a buyer (as you frequently cannot without the other party’s agreement).
With regards to contracts, if you are selling a product, customer contracts are usually made “over the counter”, whilst contracts for services should be in writing. Either way, consider whether you are giving any warranties of quality or performance. Suppliers’ contracts will normally be under their terms, so take the opportunity to read them if you have not previously or recently done so. Also, any contract which runs for any length of time should not be purely verbal or “done on the back of a fag packet”. Ensure these are formalised.
Health and Safety covers a huge and potentially dangerous area. Any buyer conducting due diligence will want to be reassured that you are fully compliant.
You may also need to be registered for Data Protection. If this is the case, you can easily check with the Data Commissioner’s office and register online if you need to.
Remember, anyone who keeps their business affairs in order and under control can pretty much go to the market or entertain offers when they want to, so keeping your house in order will allow you the freedom and flexibility of considering any offer which may arise.
To discuss any potential business sale, please contact a member of our Company Commercial team on firstname.lastname@example.org