Selling a business

8 min read

Selling a business is often the culmination of years of work. It can be a difficult, emotional and time-consuming task. It is not something that many managers or owners do more than once. You have to get it right first time. This briefing outlines:

The advice you will need.

  • Grooming the business for sale.
  • The sale process.
  • Negotiation tips.

1. The decision to sell

1.1 Plan ahead.

  • Think about the possible sale of your business several years before you intend to start the sale process. Good planning will help you maximise the value you get.
  • Consider other ways of exiting from the business. You may be unable to find a buyer, so you should look at options such as a management buy-out or passing the business on to a family member.

1.2 Be clear about your reasons for selling.

  • Common reasons include making as much money as possible, protecting your financial future, moving to something new, retirement or ill health.
  • You may feel the business and staff have better prospects under a new owner.

1.3 Write down your specific objectives.

These might include:

  • Sell by a given date.
  • Sell at a target price, or at least at a fixed reserve price.
  • Receive immediate payment in cash of at least a certain amount.
  • Continue (or not) to be involved in the running of the business.
  • Secure the jobs of your employees.
  • Minimise personal tax liabilities — early tax planning and advice is essential.

1.4 Pick the right time.

  • Consider the economic cycle.
  • Sell before your market declines.
  • Consider any forthcoming tax changes.

For those who sell a business out of choice, rather than a necessity, a common mistake is to sell too early. Spend the necessary time building up stability and profitability (see 3).

2. Getting the right advice

Choose advisers who specialise in selling businesses.

2.1 Good advisers can fill many roles

such as:

  • Boosting your credibility and making negotiations go smoothly.
  • Providing a realistic business valuation.
  • Approaching potential buyers without revealing your identity.
  • Widening the list of possible buyers.
  • Allowing you to run the business while they concentrate on selling it.

2.2 Consider using a combination of advisers to cover all aspects of selling.

  • A corporate finance adviser can help groom the business (see 3), identify buyers, and write the Sales Memorandum (see 4).
  • A non-executive director can offer objective advice and support.
  • A corporate lawyer can draft and negotiate the Sale Agreement.
  • A tax accountant (or lawyer) can minimise your tax liabilities.
  • Specialists can accurately value assets.

2.3 Agree a clear fee structure.

There are three main ways of charging fees:

  • An hourly rate. Obtain an estimate of how many hours’ work is required. Agree an upper or a review limit, and the timing of interim fee statements.
  • A fixed rate for a certain piece of work (eg drawing up the Sales Memorandum).
  • A contingency fee dependent upon success and the eventual sale price.

2.4 Divide responsibilities between advisers.

  • The instruction and fee basis for each adviser should be clear and in writing.
  • Avoid overlapping responsibilities, but seek second opinions on important issues.
  • Agree the lines of communication and make sure each party knows its responsibilities for dealing with enquiries. Take care to define who is doing what and coordinate the process.

Get key items of advice confirmed in writing.

3. Grooming the business

Showing the business in the best light is a crucial factor in gaining the best possible price.

3.1 Create a good financial record.

  • Concentrate on short-term results.
  • Try to show a stable financial pattern through the year. Delay or bring forward major purchases to help achieve this.
  • Be realistic when using depreciation figures or the timing of income in your accounts. Provisions for bad debt and old stock should also be realistic.
  • Sell under-used equipment and property.
  • Improve your working capital position by good stock management and tighter credit control.

3.2 Make sure management information systems are working smoothly.

  • Buyers will want information quickly.
  • You need to show that the business is under control.
  • Ensure the information is accurate. A buyer’s confidence will be undermined by errors.

3.3 Present the assets in good condition.

  • Premises and equipment should look well maintained.
  • Stock should be neat and orderly.

3.4 Make the business less risky from the buyer’s point of view.

  • Turn informal deals with suppliers and customers into formal contracts.
  • Establish sensible incentive schemes to encourage key employees to remain with the business.
  • Reduce dependence on a few large customers or a single source of supply.
  • Tie up any loose ends. If your tenancy agreement is due to expire soon, make sure the landlord will agree a new one, preferably in writing.

There are many ways to make a business shine, so it is always worth discussing with your adviser or non-executive directors.

4. Sales Memorandum

The Sales Memorandum is the initial marketing document sent to interested parties. It is written jointly by the management and your corporate adviser. It should:

4.1 Make the business sound attractive.

4.2 Be a source of hard information for buyers.

4.3 Show that the business can be improved.

  • This is particularly important when the buyer plans to be a hands-on manager.

Keep detailed confidential information out of a Sales Memorandum. This can be shown later to serious buyers.

5. Marketing the business

Marketing your business falls into six stages.

5.1 Find potential buyers

such as,

  • Competitors, suppliers or customers.
  • New market entrants, including foreign companies.
  • Your own management (a buyout) or another management team (a buyin).
  • Financial investment companies.

5.2 List possible buyers.

  • This should involve no more than 30 names, divided into an A and a B list.

Only use the B list if the A list does not produce results.

5.3 Approach the possible buyers to see if they are interested.

  • Keep your own business anonymous by using an adviser.
  • It is usual to approach a business through its adviser (eg the auditor), unless you have a better contact. The adviser can direct you to the appropriate person.

If the business is run by an owner-manager, approach the individual directly.

5.4 Ask your legal adviser to draw up a short confidentiality agreement for interested buyers to sign before any discussions commence.

5.5 Send out the Sales Memorandum with:

  • An outline of the sale timetable.
  • Details of where and when you would like to meet buyers.
  • A request for opening offers.

5.6 After receiving offers, draw up a shortlist of buyers.

  • Reject buyers without the finance to make the purchase.

The process of meeting buyers can be disruptive to managing and running your business. Balance the access you give buyers with maintaining confidentiality and productivity.

6. Weighing up the offers

There are many ways of paying for and taking over a business. You will need to weigh up what is on offer. The most important things to consider are:

6.1 Can the buyer really pay for the business?

  • However good an offer may sound, unless it is properly financed, it is worthless.
  • Buyers must have the right approvals (eg from the board or from shareholders).

6.2 What form will payment take?

  • Cash payment up front is the safest option but may also be the least tax efficient.
  • If deferred cash payment is offered, establish whether it is guaranteed. It may be in the form of earn-outs which are linked to future sales or profits.

In a situation where payments are reliant on the future performance of the business, make sure you retain some form of management control to enable performance targets to be met. Otherwise, you may receive less than you are entitled to.

  • A share swap is only comparable to a cash payment if the shares you receive are in a quoted company. Make sure to check the tax implications.

Shares in an unquoted company may be hard to value and difficult to sell.

6.3 What will your responsibilities and liabilities be?

  • You may be asked — or required — to remain involved in the business. But remember you will no longer be in control — consider whether you may find this difficult and frustrating.
  • You will probably be tied to warranties and indemnities for a year or more.

6.4 How will the business be run in future?

  • What expansion or sales plans does the buyer have?
  • Will any parts of the business be sold off?
  • How will the deal affect employees?
  • Will anyone be made redundant?

6.5 How long will completion of the sale take?

  • Industry and accounting due diligence must be completed. This may include an accountant’s report.

The accountant’s remit will be to verify the key management information and to identify potential problems for the buyer.

Legal due diligence may take up more time — sometimes for several months.

7. Choosing a buyer

You should now finalise sale terms.

7.1 Be sure you fully understand everything you are signing for, eg any warranties or indemnities you will have to provide.

7.2 Play off one party against another so that they raise their offers.

  • Be prepared to bluff. The buyers will negotiate, but are unlikely to pull out.

7.3 Choose the buyer you want to sell to.

  • Discuss the deal only with this candidate.
  • Do not try to negotiate better terms at this stage, as this would destroy any trust that is developing between you and the buyer. A good working relationship is important.

Your goal now is to complete the deal without any hiccups.

7.4 Quickly agree Heads of Terms with the buyer.

This is a signed agreement setting out the deal’s chief points.  Parts may be legally binding. For example:

  • An exclusivity period during which the seller cannot negotiate with anyone else.
  • Payment of the buyer’s (or your) costs.

7.5 Tell other potential buyers that you have signed a Heads of Terms with the buyer.

  • Keep at least one other buyer interested, as a back-up.

8. Completing the deal

The buyer’s offer will be subject to further due diligence and to the detailed sale agreement. Provided that this due diligence is trouble free, and neither party has any surprises up its sleeve, the sale should now be relatively safe.

8.1 The further due diligence usually involves the buyer’s accountants and lawyers.

  • The accountants will want to look at every aspect of the finances of the business.
  • The lawyers will want to check that your business has full legal ownership of all key assets (eg property deeds and licensing contracts). They will also want to look at the legal relationships with customers, suppliers and employees.

Many legal issues are covered by warranties and indemnities that you, as a vendor, will almost certainly be asked to sign. Read these carefully — they can be far reaching.

8.2 Certain members of your staff (e.g. Finance Director or Company Secretary) may have to be involved early on in the due diligence process.

  • Be mindful of the feelings of your employees, especially when communicating your plans, as you may lose key members of staff if they fear their jobs are in jeopardy. Under EU rules, businesses with more than 50 employees have to notify and discuss, with their employees, any changes likely to affect their jobs. Penalties for non-compliance can be severe.
  • Carefully consider who you tell and when you tell them.

8.3 Finalise the sale and purchase agreement.

Getting your price

Once you have received opening offers, start the bargaining process.

  1. Set a price.
  • Decide what price you are likely to get.
  • Reject buyers who are significantly below this level.

2. Coax the remaining buyers into closer contact, keeping them well informed.

  • Offer them access to selected members of your team.
  • Distribute positive business data, before the buyers ask for it.
  • Be ready to counter negativity.
  • Be open and transparent.

3. Spur buyers into action. Ask for final offer

  • Tell them how much to raise their offers.
  • Consistently emphasise the future business opportunities.
  • Make it clear that other buyers are also seriously interested in the business.

Setting and holding out for a high price usually pays off. Potential buyers will gain an impression of genuine self-confidence.

Further Information

As a firm, we are able to provide a wide range of services tailored to your particular industry.  We believe by staying up to date with not only current but changing legislation and industry news we are better placed to help our clients and their businesses succeed. 

If you would like to discuss any of the topics in this update or how Loucas can assist you please do not hesitate to contact us.

The information contained in this publication has been prepared for general guidance and is not intended as advice.  Whilst every care is taken to ensure the accuracy of the information, no responsibility can be accepted by Loucas for any loss resulting from acting or refraining from acting as a result of any material in this publication.  The information in this publication is not designed as a substitute for seeking professional advice.

Investors’ Relief (IR)

1 min read

If you do not meet the criteria for Business Asset Disposal Relief (BADR) you may still be able to take advantage of the ow 10% rate of tax through IR.

Business Asset Disposal Relief (BADR) has been extended to external investors (other than certain employees or officers of the company) in unlisted trading companies. To qualify for the 10% CGT rate under ‘investors’ relief’ the following conditions need to be met:

  • shares must be newly issued and subscribed for by the individual for new consideration
  • be in an unlisted trading company, or an unlisted holding company of a trading group
  • have been issued by the company on or after 17 March 2016 and have been held for a period of three years from 6 April 2016
  • have been held continuously for a period of three years before disposal.

An individual’s qualifying gains for IR are subject to a lifetime cap of £10 million.

How we can help

We can advise as to the best course of action in your own particular circumstances. If IR35 does apply to you we can help with the necessary record keeping and calculations so please do contact us.

The construction industry and VAT: analysing the changes

6 min read

The VAT domestic reverse charge for building and construction services comes into effect from 1 October 2019. Given the scale of the changes, it would be appropriate for businesses to plan for the reverse charge now.

The reverse charge: an overview

The reverse charge represents part of a government clamp-down on VAT fraud. Large amounts of VAT are lost through ‘missing trader’ fraud. As part of this type of fraud, VAT is charged by a supplier, who then disappears, along with the output tax. The VAT is thus lost to HMRC. Construction is considered a particularly high-risk sector because of the potential to make supplies with minimal input tax but considerable output tax.

The reverse charge does not change the VAT liability: it changes the way that VAT is accounted for. In future, the recipient of the services, rather than the supplier, will account for VAT on specified building and construction services. This is called a ‘reverse charge’.

The reverse charge is a business-to-business charge, applying to VAT-registered businesses where payments are required to be reported through the Construction Industry Scheme (CIS). It will be used through the CIS supply chain, up to the point where the recipient is no longer a business making supplies of specified construction services. The rules refer to this as the ‘end-user’.

Broadly then, the reverse charge means that a contractor receiving a supply of specified construction services has to account for the output VAT due – rather than the subcontractor supplying the services. The contractor then also has to deduct the VAT due on the supply as input VAT, subject to the normal rules. In most cases, no net tax on the transaction will be payable to HMRC.

The charge affects only supplies at standard or reduced rates where payments are required to be reported via CIS and not to:

  • zero-rated supplies;
  • services supplied to ‘end-users’ or ‘intermediary suppliers’.

Under the scheme a VAT-registered business, receiving a supply of specified services from another VAT-registered business, for onward sale, on or after 1 October 2019:

  • should account for the output VAT on supplies received through its VAT return
  • does not pay the output VAT to its supplier on supplies received from them
  • can reclaim the VAT on supplies received as input tax, subject to normal VAT rules.

The supplier should issue a VAT invoice, indicating the supplies are subject to the reverse charge. An end-user should notify its end-user status, so the supplier can charge VAT in the usual way.


Safe as Houses Ltd is a VAT-registered contractor. It uses Brickyard Bill, who is also VAT-registered. Brickyard Bill tells Safe as Houses that the reverse charge applies.

Safe as Houses does not pay VAT to Brickyard Bill. It accounts for the VAT on its own VAT return, entering it as both output and input tax. It enters the value of the purchase from Brickyard Bill as part of its inputs. It does not include the value in its outputs.

Their VAT returns will look like this:

  • Brickyard Bill puts the value of the sales in box 6 of the VAT return, but no output tax in box 1
  • Safe as Houses uses box 1 to declare the output tax on the services from Brickyard Bill to which the charge applies. It doesn’t include the value of the transaction as an output in box 6. It reclaims the input tax on reverse charge purchases in box 4 and includes the value of purchases in box 7.

Consequences for businesses

Details of the charge have changed since it was first announced. Originally, the charge was to apply to ‘labour-only’ supplies. Now however, the charge applies to construction services, including materials. With the domestic reverse charge, the value of reverse charge supplies will not count towards the VAT registration threshold of the recipient business.

For many construction businesses, the change is likely to have far-reaching consequences. Processes will need to be in place to ensure VAT accounting systems are compliant with the unusual requirements of the reverse charge. The rules require a number of verification checks to ascertain VAT status of customers, CIS registration (in some circumstances) and end-user or intermediary supplier status.

Given that output VAT currently provides many businesses with a positive cashflow advantage, the impact on cashflow and liquidity will also need appraisal. Changing to a monthly VAT return cycle to accelerate payments due from HMRC may be of benefit. The VAT Flat Rate Scheme (FRS) may no longer be of benefit, and reverse charge transactions cannot be dealt with through the Cash Accounting Scheme.

Specified services

Construction services covered by the reverse charge are those falling within the category of ‘construction operations’ for the CIS, and include the construction, alteration, repair, extension, demolition or dismantling of buildings or structures, including offshore installations.

Works forming part of the land are also included, such as walls; pipe and power lines. So too are preparatory services such as site clearance and scaffold erection; the installation of systems of heating and lighting; and painting and decorating. The reverse charge includes goods, where supplied with specified services.

Supplies excluded from the charge, where these are supplied on their own, include the services of architects, surveyors and some consultants; and the manufacture of building or engineering components, materials or plant.

Services with reverse charge and excluded elements

Where excluded services are supplied with services subject to the reverse charge the whole supply is subject to the reverse charge. As it can be difficult to determine in some situations whether the reverse charge applies, if there has already been a reverse charge supply on a construction site, any subsequent supplies on that site between the same parties may be treated as reverse charge supplies, if both parties agree.

Where there is any doubt, HMRC recommends reverse charging, if the recipient is VAT-registered and payments are subject to the CIS.

Considering end users

The domestic reverse charge applies to VAT-registered businesses throughout the CIS supply chain, but is designed not to apply to ‘end-users’ or ‘intermediary suppliers’. ’End-users’ are VAT-registered businesses receiving supplies of specified services which are not sold on as construction services.

Examples could be a construction firm selling an interest in land as a newly built office, or a large retail business having trading premises built for its own use. Intermediary suppliers are VAT and CIS registered businesses that are connected or linked to end-users. Examples could be landlords and tenants, or recharges of building and construction services within a group of companies.

Businesses will need to know when they are dealing with an end-user or intermediary supplier, so they can invoice appropriately. The end-user or intermediary supplier should inform the supplier of their status so that VAT can be charged as normal. If the end-user does not provide confirmation of status, the supplier should issue a reverse charge invoice.

Businesses dealing frequently with end users may wish to include a statement, in business terms and conditions, to the effect that it is assumed that the customer is an end-user, unless they indicate otherwise.

Effective invoicing

To invoice correctly under the new rules, suppliers should mark the invoice to the effect that the domestic reverse charge applies, and that the customer must account for VAT. The amount of VAT due under the charge should be clearly stated on the invoice. It should not be included in the amount shown as total VAT charged.

The rules require that when the customer is liable for VAT, an invoice should include the reference ‘reverse charge’. Any of these are acceptable:

  • Reverse charge: VAT Act 1994 Section 55A applies
  • Reverse charge: S55A VATA 94 applies
  • Reverse charge: Customer to pay the VAT to HMRC.

Where invoices are created with an IT system that cannot show the amount to be accounted for, HMRC refers suppliers to VAT Notice 735, ‘Domestic reverse charge procedure’

HMRC’s policy

HMRC has issued technical guidance

There will be a ‘light touch’ approach to genuine mistakes and penalties for six months from October where businesses are aiming to comply and act in good faith. Businesses knowingly claiming end-user status when the reverse charge should have applied, however, will be liable for the tax due and may be liable for penalties.

How will the changes affect you

The new rules will have a significant effect on VAT compliance and cash flow. Key questions to consider include:

  • is the reverse charge likely to apply to supplies to and from other VAT-registered contractors and subcontractors you deal with?
  • how will your accounting systems calculate and report reverse charge supplies?
  • how will you check on an ongoing basis that supplies and purchases are treated correctly?
  • will your cashflow suffer if you no longer hold output tax, and would changing to monthly VAT returns help?
  • if you use the VAT Flat Rate Scheme, how will the charge impact you?

Overall, the change may mean that the construction sector is likely to be subject to considerable HMRC scrutiny in the foreseeable future. Under the rules, for example, some subcontractors, with VAT to reclaim on inputs but no VAT to charge on outputs, will regularly receive VAT refunds.

A regular repayment position could trigger a VAT inspection. For these reasons, we would recommend taking stock of VAT and CIS compliance across the board.

How we can help

In this blog, we have only been able to touch on some of the key issues. Please contact us for an in-depth discussion on the matter.

Extra resources

DISCLAIMER: This blog is for guidance only, and professional advice should be obtained before acting on any information contained herein. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.