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Selling a business can be a lengthy process. It will involve several important steps to ensure that you properly convey your business to the new owner. These will include due diligence, drafting and reviewing contracts, and negotiating the terms of the sale. As the seller, you should get to know your obligations at each stage of the sale process. Of course, your obligations might vary depending on what type of business you have. This article will outline key points to keep in mind when selling your business.
General Obligations
Some general obligations will apply to all sellers who participate in a sale process. For instance, you will want to ensure that you comply with the due diligence and the negotiation process to ensure a smooth transition.
Due Diligence
The due diligence process refers to the research stage of the sale. For example, a potential buyer will want to know the assets, liabilities, legal documents, and financial statements which are part of your business.
This means that you will have to provide the relevant information and documents to the potential buyer. If the potential buyer sends a letter of intent (LOI) that has a due diligence clause, then your obligation to supply the relevant documents may be contractual. Therefore, failure to do so will mean that you are in breach of the contract. Being in breach of contract will usually mean that you have to pay damages (compensation) to the other party.
Type of Sale
You should also remember that your obligations in the due diligence phase will vary depending on exactly what is being sold.
Therefore, becoming familiar with the type of sale is essential to knowing your due diligence obligations.
Staff Obligations
If you are selling your business, you may have obligations to your staff. For instance, if you are a self-employed sole trader or you are in a business partnership, you must tell your staff:
- when and why you are selling the business; and
- if necessary, relocation packages and redundancy terms.
TUPE Regulations
You must not breach employee rights when a business changes ownership. The ‘Transfer of Undertakings (Protection of Employment)’ (TUPE) regulations protect employee rights.
Therefore, you must familiarise yourself with TUPE regulations to fulfil your obligations. Generally, knowing your employment contracts is very important so you can be aware of your obligations to employees.
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Tax Returns Obligations
Selling your business will also have tax implications. For example, if you are a self-employed sole trader or selling a business partnership, you must send a Self Assessment tax return, which you can find on the UK government website.
Additionally, you may have to pay capital gains tax when selling your business, regardless of your business structure. However, you may be able to reduce the amount that you pay on capital gains tax by claiming relief. One example is Entrepreneurs’ Relief which is also available on the UK government website.
In particular, if you are selling a business partnership, you will have different obligations if you are selling the whole partnership (as opposed to your share in the partnership). For example, you will need to ensure that your partner sends a ‘Partnership Tax Return’, alongside your ‘Self Assessment’ tax return.
VAT Registration Obligations
If you register for VAT (or value-added tax), then you will also need to transfer the VAT registration number to the new owner of the business. You can apply for a VAT registration online using a VAT online account. This will usually take around three weeks to be confirmed by HM Revenue and Customs (HMRC).
Key Takeaways
It is a good idea to know your obligations to the potential buyer of your business during the sale process. These will include obligations in the due diligence phase (such as details about certain assets like intellectual property rights), as well as employment contracts, tax and VAT. It is advised that you seek professional advice if the sale is complex to avoid potential legal risks during the sale. If you need help with your obligations when selling your business, our experienced business sale and purchase 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
You will often be liable for breach of contract, which will mean that you have to pay damages (in the form of compensation) to the aggrieved party. Because of this, it is a good idea to make sure you know all of your obligations at each stage of the business sale.
The ‘Transfer of Undertakings (Protection of Employment)’ (TUPE) regulations protect employee rights. They apply to employees of UK businesses when there is a business transfer.
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