Why now is the right time to sell your business
The Chancellor has commissioned a review of Capital Gains Tax (CGT) and an increase in rates in the next budget (March 2021) seems inevitable. With these changes and likely eradication of Business Asset Disposal Relief (BADR), the window to complete the sale of a business and enjoy relatively low rates of CGT is closing. For business owners who have a two to five-year exit plan, it could be worth bringing the timing forward to maximise value.
How will Capital Gains Tax changes affect my business?
At present, CGT needs to be paid on assets over £1m at a rate of 20%. If the BADR of 10% on the first £1m of gains is no longer applicable, the government will apply the higher rate of CGT to many more businesses than they have in the past. Selling after March 2021 could mean a significantly reduced return on your sale.
Why should I sell my business now?
In an ideal world, business owners looking to sell under optimal circumstances - usually when the business is climbing a growth curve or when market conditions are advantageous. However, sometimes outside events can drive the timing of a sale. Given the events of 2020, and its impact on the economy, businesses that have weathered the Covid-19 storm are currently in a favourable position. However, failure to sell now could mean settling for a significantly lower return after March 2021.
How do I prepare for the sale?
To sell all or part of your business, there are a number of steps that need to be completed. Some of these will vary depending on the nature of your company, but there are legal processes that can take time. You’ll need to have everything done ahead of the potential tax increases.
Getting your ducks in a row is the most important part of preparing for sale. Running your business with the exit in mind means being meticulous in recording transactions, having contracts up to date and intellectual property protected. Preparing for the scrutiny of buyers also means dotting the ‘I’s and crossing the ‘T’s. From tidying books to refurbishing premises, even minor details can make a difference, helping the value of your business and the speed of the sale.
Do I need specialist advice?
Running a business is a full-time job in itself, so it is worth bringing in a specialist broker or advisor to manage the selling process. Business exit professionals can guide you through valuation, finding buyers, troubleshooting, negotiating a price, due diligence, and completion. They can also spot red flags and anticipate bumps in the road.
Selling your business can be a highly emotive process, so an objective third party can be an invaluable buffer. And, given that time is of the essence, the guiding hand of an experienced professional is the safest route to a smooth and successful completion.
How is the value of my business calculated?
Business valuation is more of an art than a science and is another reason to have an experienced professional on board. Businesses are sold on commercial potential rather than cash value, and there are various ways a valuation figure can be achieved – factoring in physical assets but also the brand reputation and future growth.
What are the steps to selling my business?
In the sale of any business, there are standard transaction processes you can expect to go through.
If you are a sole trader or in a partnership, the sale is an asset sale – selling the assets that make up the business. For a limited company, the sale can be structured as an asset sale or a shares sale. There are different tax implications for each so consult with your accountant to find the most appropriate route for you.
Limited companies also need to ensure that all information about the company is up to date and that the process for selling shares or the business as a whole is clearly set out in the shareholders’ agreement. There may also be assets to merge or consolidate.
A seller’s checklist lists all the key information your buyer needs from you and must be an honest account of your business. Note down all assets and liabilities, contracts, and client details.
Your buyer will want to see financial records, business plans, future projections, and any IP (Intellectual Property) you hold. They may also ask to speak to existing clients and suppliers.
There are 8 main steps to the selling of a business:
1) Preparation, data gathering and verification
2) Business review and IM preparation
3) Qualifications of potential buyers
4) Due diligence preparation
5) Deal negotiation
6) Heads of terms
7) Due diligence and legal documents
8) Transaction completed
Business owners often underestimate the time required to prepare a business properly before going to market and finding the right buyer. By conducting research and getting organised, you will give yourself the best chance of a timely and efficient sale.
The importance of acting now
Time is running out, so if you are in a position to sell your business or would like to explore your options before tax changes are implemented, it is vital to start the process now.
At Evolution Capital, we have supported countless entrepreneurs in successfully navigating the sale and purchase of businesses. If you would like more advice on selling your business, contact us now to discuss your options.
Read more about our completed transactions here.