Steps to follow
Whether you are buying or selling a business, the first step is to put a value on it. This is a negotiable matter. Valuing a business is a complex process, so consider hiring an outside expert to help.
You should take into account more than the existing assets and liabilities. Think about the projected profits, cashflow, the need for future capital expenditure and the general state of the economy. Intangibles such as goodwill, customer relations and growth potential should be taken into account. Skilled and committed employees will increase the value.
The value is sometimes derived from a multiple of earnings following an adjustment of projected profits for any one-off items or events. A small business will have a lower multiple than a large business. Comparing it with similar existing businesses that have been sold may give you a clearer idea of what its worth. If all this is as clear as mud, ask an expert.
You must keep employees informed and consulted during the transfer process, under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). The terms and conditions of employment are preserved during the transfer. You should consult an employment lawyer to ensure you are fulfilling all the requirements, or you may be susceptible to employee claims for damages at a later date.
If you are selling, can you minimise your capital gains tax liability? Ask an accountant and make the most of any tax reliefs available. Make sure your accounts are in order before you sell.
The sales memorandum is the initial marketing document drawn up by the seller. It will give basic details about the sector, trading, finance, employees and premises. Before receiving a copy, a prospective buyer will usually have to sign a confidentiality agreement.
It is up to the seller to check the potential credit-worthiness of prospective buyers.
The buyer will make a purchase offer before the transaction is completed. This covers the terms for payment and handover, and is not legally binding. The seller will compare several offers and select a buyer.
Preliminary due diligence takes place once a buyer is selected. A firm offer is then negotiated, and a document called a Heads of Terms agreement is drawn up. Some parts of this are legally binding, and the buyer may be able to claim damages if the sale subsequently falls through.
This will be followed by detailed legal, financial and commercial due diligence. The terms of sale may be modified at this stage.
On completion, the change of ownership must be registered at Companies House.
What to watch out for
Are you buying at the right time? Some businesses flourish in the summer, others are busy in the run-up to Xmas. Will you hit the ground running, or buy into the business during a fallow period?
Solicitor’s top tip
If you are buying, ask for an indemnity from the seller to cover future losses resulting from tax or VAT inspections into accounts drawn up before you took over.
Buying or selling a business
Buying or selling business premises
Company filing requirements
Overview of business property
Overview of environmental health and safety requirements
Overview of insurance for business
Types of businesses