Summary
- Choose your valuation method carefully: income, asset and market approaches produce different prices, and using the wrong one can undervalue your company.
- Set clear payment terms in the sale agreement, covering timing, instalments and any earn-out conditions tied to future profit.
- Decide early whether you are staying on, since this shapes whether you structure the deal as a share sale or an asset sale.
- This guide explains the legal considerations business owners face when selling a company in the UK.
- LegalVision’s business lawyers specialise in advising clients on business sale and purchase transactions.
Tips for Businesses
Get an independent valuation using the method that suits your business, not the one that flatters the price. Fix payment terms and any earn-out conditions in writing before heads of terms. Confirm which assets, contracts and employees are included, and check your TUPE obligations before agreeing terms with a buyer.
Selling a UK company involves agreeing a valuation, structuring the deal as a share sale or asset sale, and settling how and when the buyer pays. Under the Transfer of Undertakings (Protection of Employment) Regulations 2006, employees typically transfer automatically to the buyer on their existing terms in both share and asset sales, though TUPE generally does not apply where only shares change hands and the employing company stays the same. Sellers must also confirm which assets, contracts and intellectual property form part of the sale, and record all of this in a business sale agreement. Getting these points wrong before signing can reduce your sale price or leave you exposed to disputes after completion. This article explains the legal considerations to work through before you sell your company in the UK.
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.
Buying a business? Download this free guide to help you negotiate key terms like price, stock, and employee entitlements.
Employee Obligations Under TUPE
The Transfer of Undertakings (Protection of Employment) Regulations 2006, known as TUPE, govern what happens to employees when you sell your business. In most business and asset sales, TUPE applies, meaning employees automatically transfer to the buyer on their existing terms and conditions, including pay, continuity of service and most pension rights. You cannot pick which employees transfer and which do not.
TUPE also places information and consultation obligations on you as the seller. You must inform affected employees, or their representatives, about the transfer, its timing and its implications, and consult on any measures the buyer plans to take. Failing to do this properly can expose you to a protective award of up to 13 weeks’ uncapped pay per affected employee.
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
Do employees usually remain in employment when the owner of a business changes?
In most business and asset sales, TUPE applies and employees transfer automatically to the buyer on their existing terms, including pay and continuity of service. TUPE generally does not apply to a share sale, since the employing company stays the same.
What legal documents are involved in a business sale?
A business sale agreement is the primary legal document, setting out the purchase price, assets included, warranties and completion terms. Sellers also typically need board and shareholder resolutions, and should update Companies House filings after completion.
What is the difference between a share sale and an asset sale?
In a share sale, the buyer acquires the company itself, including its liabilities. In an asset sale, the buyer acquires specific assets only, and the seller usually retains responsibility for existing liabilities and contracts not transferred.
What should a business sale agreement include?
A business sale agreement should set out the purchase price and payment terms, the assets and liabilities included, warranties and indemnities, and completion conditions. It should also address any earn-out arrangements tied to future performance.
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