Best way to sell a small business in the UK: brokers, valuation, legal fees and tax

What is the best way to sell a small business in the UK? Selling your business is one of the most significant financial decisions you will ever make, whether you are planning retirement, moving on to a new venture, or simply ready to cash in on years of hard work. Getting the sale process right is the difference between a good result and a disappointing one. This guide covers the three things I am asked about most: whether to use a broker and how to maximise your valuation, what to budget for legal fees and how to structure the sale, and the taxes you need to plan for.

Should you use a business broker?

The first decision most sellers face is whether to go to market themselves or hand the process to a broker. There are a few genuine advantages to using a broker.

• They save you time. A broker screens buyers, organises the documents and coordinates meetings, so you can keep running the business while it is being sold, which matters because a business that slips while it is on the market is worth less.
• They can create competition. A good broker may attract multiple buyers. More than one interested party means competition, and competition drives up the sale price.
• A higher chance of a sale. Typically there is a better chance of the business actually getting sold if you are using a professional rather than trying to find a buyer yourself.

Business broker downsides and questions to ask

There are disadvantages too, and you should weigh them honestly.

• A quick sale, not the best sale. A broker may be motivated to get the deal done quickly rather than to get the best deal for you.
• Fees without guarantees. You will pay a commission and usually upfront marketing fees, with no guarantee that your business will sell.
• Exclusivity. You will typically sign an exclusivity agreement that forces you to pay the broker even if you find a buyer by other means. If a competitor, a customer or a member of your own team comes forward with an offer during the exclusivity period, the commission is usually still payable.

Before you sign up with a broker, ask a couple of questions to work out whether they are the right one for you. First, how would you market my business, how would you find buyers, and what kind of buyer do you think would be a good fit? Second, in percentage terms, how many of the businesses you take on actually sell, say, within 12 months? A broker who cannot answer either question clearly is telling you something. You are looking for someone with a real plan for your specific business and a track record of actually completing sales, not just listing them. There is more on this in my separate guide to business brokers.

How to value a business: 3 methods

There are three main ways to value a small business.

• Asset-based. Take the assets, deduct the liabilities, and the result is your net asset value.
• Earnings multiplier. Multiply profits by the multiplier that is standard for your industry. If businesses like yours typically change hands at three times profit, a business making £500,000 would be valued at around £1.5 million on this approach.
• Discounted cash flow. Estimate future earnings and discount them back to present value, on the basis that a pound tomorrow is typically worth less than a pound today.

Each method suits a different kind of business, and each can be argued up or down. I go through all three in detail, with the ways a seller can improve each, in my guide to valuing a business before you sell.

How to increase your business valuation

Whatever valuation method the buyer uses, there are two things you should do before you go to market.

• Find a way to guarantee revenue. Ideally this means having contracts in place with clients that commit them to purchase orders. Guaranteed revenue is worth far more to a buyer than revenue that depends on goodwill.
• Prove the business can run without you. Show that there is a system in place and a team in place that does not need you to stay with the business. A buyer who thinks the business is really just you will either discount the price or want you locked in for years. Both of these points take time to put in place, so the earlier you start, the more they will be worth when you come to sell.

Legal fees for selling a business

Sellers often ask me what they should budget for legals. In my experience, legal fees for a business sale usually start at around £8,000 to £10,000 plus VAT, and from there they tend to run at roughly 1% of the sale price. So, as a rough example, if you are selling your business for £3 million, the legal fees will probably be in the region of £30,000. Every deal is different, but that gives you a starting point for your budget. Legal fees are one of the costs that sellers most often forget to plan for, and they come on top of any broker commission.

Share sale vs asset sale for sellers

From a legal perspective you have two main ways to structure the sale: a share sale or an asset sale.

Sellers usually opt for a share sale, because you are selling the entire limited company. It is a cleaner break. You hand over the whole company, with its assets, contracts, staff and liabilities, and you receive the money. There is nothing left behind for you to administer.

If you do an asset sale instead, the company itself stays with you and only certain assets pass to the buyer. That means you might be left with liabilities, potentially including liabilities you do not yet know about, because the buyer has cherry-picked the assets and left the company, and everything attached to it, with you. You will then need to deal with closing down the limited company and making sure that process is compliant. You will also have two layers of tax to think about: tax in the company on the sale of the assets, and tax when you extract the money from the company to yourself. There is a short page on share sale vs asset sale if you want the comparison on its own.

Tax when selling a business (UK)

Tax is where the structure of the sale really bites. There are four taxes to be aware of when you sell, and which ones apply depends largely on whether you do a share sale or an asset sale.

• Capital gains tax. This might be payable on the increase in the value of your shares between the date you acquired them and the date you sell.
• VAT. On an asset sale, VAT might be payable by the business when it disposes of its assets. In practice this is usually avoided by arguing that the transaction is the transfer of a business as a going concern.
• Income tax or dividend tax. On an asset sale, there may be income or dividend tax to pay when you extract the sale proceeds from the limited company.
• Corporation tax. On an asset sale, the company may have sold its assets at a profit, which is taxable in the company.

Business Asset Disposal Relief (BADR)

This is the reason a share sale is usually preferable for a seller. On a share sale you are generally only concerned with capital gains tax, and that can be reduced using Business Asset Disposal Relief, which at the time of recording brings the rate down to a minimum of 14%. Compare that with an asset sale, where you may be dealing with corporation tax in the company, VAT on the assets and then income or dividend tax on extraction, and the attraction of a clean share sale is obvious. The same headline price can leave you with very different amounts in your pocket depending on the structure. For a deeper look at the planning points, see how to pay less tax when selling your business.

Next steps

Start with the two things that move the valuation: lock in revenue with client contracts and build evidence that the business runs without you. Then decide whether a broker is worth the fees for your business, settle on a share sale or asset sale structure, and speak to a corporate solicitor and an accountant early so that the legal and tax planning happen before you agree a price, not after.