Summary
- Before selling a company in the UK, owners must address due diligence, warranties, indemnities, and the structure of the deal to protect their legal position.
- Disclosure obligations and restrictive covenants can significantly affect the terms of a sale and the seller’s post-completion obligations.
- Understanding the difference between a share sale and an asset sale is essential, as each carries distinct legal and tax implications.
- This article is a plain-English guide to the key legal considerations for business owners looking to sell their company in the UK.
- It has been produced by LegalVision, a commercial law firm that specialises in advising clients on business sales and purchases.
Tips for Businesses
Identify early whether a share sale or asset sale suits your circumstances, as this shapes tax outcomes and liability exposure. Prepare a disclosure letter carefully to limit warranty claims. Review any restrictive covenants before signing. Instruct a solicitor to conduct vendor due diligence in advance to avoid delays during negotiations.
Selling a business is a significant legal transaction that requires careful planning well before any deal is signed. Getting the process right protects your interests and maximises the value you receive. This article will explore some important legal concerns you need to consider before formally selling your UK business. This should ensure you achieve the best sales conditions and a reasonable price.
1. Ensuring a Fair Business Valuation
Naturally, one of the most important aspects of a business sale is to agree on a suitable price.
There are three main ways of valuing a UK limited company. Let us explore these below.
Income Valuation Method
This bases the purchase price on current sales figures, pricing, and future income and profit predictions. Naturally, predictions as to future business income can be unstable, and you should ensure the figure is within accurate bounds.
Asset Valuation Method
This suits companies with large amounts of assets. This valuation method seeks to value:
- tangible assets, such as machinery, stock and vehicles; and
- intangible assets, such as goodwill and Intellectual Property (IP).
There is little point in using this method if your business has few assets.
Market Value Approach
This seeks to compare your company to similar businesses in the same industry and geographical area. So, for example, they may compare an Italian restaurant in London to other Italian restaurants of a similar size within a two-mile radius. The comparison usually involves considering:
- average figures for income;
- expenditure; and
- profit from rival companies.
It is vital to pick the correct valuation method to avoid selling your company to a prospective buyer at an undervalue. So, if your business has low stock and no significant tangible or intangible assets, you should use a different valuation method to set the purchase price.
2. How and When Are You Receiving Payment?
Once you have set the purchase price, it is essential to set boundaries on how and when they will pay it.
It is important to remember that negotiating a reasonable purchase price is the first step. It is vital to ensure that you close any loopholes that allow the purchaser to delay payment unreasonably.
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3. What Assets Does the Sale Include?
Many prospective buyers wish to obtain a business for multiple reasons. These reasons could include the following:
- the positive goodwill surrounding the company;
- the large customer following;
- the high level of assets owned by the organisation;
- profit levels that seem to increase annually; and
- the use of modern equipment and machinery to deliver relevant goods and services.
With this in mind, the parties must clarify what parts of the business form part of the sale. Furthermore, explicitly state which parts, if any, will not transfer to the new owner.
The majority of business purchase scenarios will transfer the following elements:
- business assets (including machinery, equipment and business premises);
- employees (who will usually remain in place despite a change in ownership);
- information belonging to the company (such as copyright, trademarks and confidential information);
- all Intellectual Property in the company’s name; and
- the rights to the business name and branding.
You should include these decisions within a Business Sale and Purchase Agreement.
4. Are You Staying Within the Business?
The final point is the least considered of the ones within this article. Consider whether you will remain with the company after selling the business.
Whilst most business owners will depart at the point of sale, some will remain to effect an orderly transition from one owner to another. Alternatively, some sellers maintain a positive relationship with potential buyers and stay involved with the company through a consultancy position.
Selling your business involves a number of moving parts. This fact sheet will provide an overview of the sale of business process and
the documents you need to make an effective sale.
Key Takeaways
The sale of your business involves much more than negotiating a reasonable purchase price. Achieving a good deal involves carefully considering what you are willing to sell and on what terms. It is also vital to accurately detail the agreed terms within a detailed legal contract (usually a Business Sale and Purchase Agreement).
LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced business sale lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Because the Transfer of Undertakings (Protection of Employment) Regulations 2006, usually nicknamed ‘TUPE’, safeguards employee jobs upon change of ownership. Employees typically quit their jobs to follow a business owner to another organisation.
Whilst much depends on the type of business being sold, the sale process can sometimes include the negotiation and agreement of confidentiality agreements, non-disclosure agreements and the sale agreement itself. A company should also submit paperwork to Companies House to update its owner’s register.
Yes, employees typically transfer to the new owner upon sale and usually remain in their roles despite the change in ownership.
Yes, a buyer can request a restraint of trade clause to prevent the seller from establishing a competing business after the sale completes.
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