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Selling your company can be an exciting time. After much hard work and effort, you may negotiate a profitable and satisfying deal. However, the process of selling your business is a complex one, and there are a few legal considerations that need addressing first. This article will explore key legal considerations before signing on the dotted line and formally selling your UK business.
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, which include:
- income valuation method – this bases the purchase price on current sale figures, pricing, and predictions as to future income and profit. Naturally, predictions as to future business income can be uncertain, and you should take care to ensure the figure is within accurate bounds;
- asset valuation method – typically, this method suits companies with large amounts of assets. This valuation method seeks to value physical assets (such as machinery, stock and vehicles) and non-physical assets (such as goodwill and intellectual property). There is little point in using this method if your business has few assets to its name; and
- market value approach – this seeks to compare your company to similar businesses in the same industry and geographical area. 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 consideration of average figures for income, expenditure and profit from rival companies.
How and When is the Purchase Price Being Paid?
Once you have set the purchase price, it is essential to set boundaries on how and when the buyer will pay it.
Consider the following questions.
- Do you want the buyer to pay the whole purchase price at once, or are you happy to receive it in equal instalments?
- Do you wish to negotiate a purchase price that will increase upon meeting certain conditions? For example, you might negotiate to double the purchase price if the company achieves higher profits within 12 months of sale.
- How do you wish to receive the purchase monies? For example, many business owners will specify that the amount should be transferred as one lump sum into a specified bank account by a specific date.
It is important to remember that negotiating a reasonable purchase price is just the first step. Ensuring that you close any loopholes that allow the purchaser to delay payment unreasonably is also critical.
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What Assets and Property are Part of the Sale?
A business sale involves many parts which you and the buyer must negotiate. These parts are known as ‘assets,’ and parties must be clear about which business assets are for sale and to be transferred to the new owner
A potential buyer may be interested in your business for the following reasons:
- positive goodwill surrounding the company;
- your 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.
A typical business sale will involve the sale (or transfer) of 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.
Are You Staying Within the Business?
The final point is whether you, as the selling business owner, want to remain within the company. If you still want to maintain control of the day-to-day operations of your business, consider a share sale rather than a business/asset sale.
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. The most important point is that the sale of a business does not automatically ban you from any involvement with them in future years.
LegalVision’s Buying a Business: Guide to Negotiating Terms allows you to protect yourself by understanding which key terms to negotiate when buying a business.
Key Takeaways
The sale of your business involves much more than negotiating a decent 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 agreement).
If you need help negotiating and documenting the sale of your UK business, our experienced business sale lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
When a business is sold, it is common for employees to leave. They either follow the previous owner to another organisation or find employment elsewhere. However, the new owner may want to hire previous employees, as they have experience with the business and its customers.
Typically, the sale process will include the negotiation and agreement of confidentiality agreements, non-disclosure agreements and the sale agreement itself. Naturally, a company should also submit paperwork to Companies House to update its owner’s register.
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