Selling your business: How to properly hand over your business to new owners
In business, if a company changes hands, it means that there has been a change in its ownership. From wanting to sell your business to focus on other ventures, to deciding to take a step back from the world of work, there are several reasons why you might want to sell your company.
Whatever the reason may be, it’s not a decision to be made lightly. That’s why understanding the full process of handing over a business to new owners, and being aware of any knock-on effects it may have, is vital.
To help you work out whether it’s the right move for you, our handy guide can help walk you through all the essential steps with everything you need to know about transferring business ownership.
What does it mean to transfer your business’ ownership?
In short, transferring the ownership of a business is when the legal ownership of a company changes possession from one party to another.
There are many situations where transferring ownership can be the best route to go down. Typically these include some common circumstances like:
- External circumstances mean that you aren’t able to continue running your business at its full potential, such as health or personal finance reasons
- The time has come for you to retire
- You have another business venture that you’d like to dedicate more time to
- You want to raise money to invest in another company — take a look at our handy guide to buying a business to learn more about acquiring a new company.
- You have grown your business as much as you can, but want to hand it over to new owners to take it further
- Your business has reached peak profitability and you want to get out before a decline in business starts
What are the different methods of transferring business ownership?
Transferring ownership doesn’t just mean passing the baton over to someone else. There are various methods of business ownership transfer; they ultimately depend on the owner’s needs, the market, and the nature of the business itself.
Business ownership transfer options each have their own legal and financial requirements. The structure of a business will also affect the transfer process and, in most cases, an owner will need to consult with lawyers and accountants to properly execute all the appropriate steps.
1. Selling the business
Selling a company is one of the more common ways of transferring ownership. It’s a great option for businesses that have built up a lot of value, as owners can cash out on their profits while also passing on their company to someone else.
For private businesses, a business valuation will need to be carried out. These are often performed by professional evaluators and they help to determine the market value of a business. They’re essential for helping the seller to set a reasonable sale price for a company.
There are two ways to go about selling a business:
- Cash financing — The company is bought using personal finances or through a loan.
- Owner financing — The company is financed through a sale where the buyer pays off the cost of the business over an agreed-upon period of time. This is usually set by the seller.
2. Giving it to a family member
This tends to occur in situations where a business has a history of being passed along the generations. An owner may want to give the business to a younger member of their family in order to retire. In this case, the most common way for a family to hand over the business is in small instalments across a set amount of time.
This is because each tax year there is an allowance for how much money, property, stocks, shares, and goods an individual can gift before they have to pay Inheritance Tax. The amount depends on the type of allowance used.
It’s also possible to give your business to a beneficiary so that they can receive your company in the event of your passing. This will need to be actioned through your will or a legally-binding succession plan.
3. Acquiring a new partner
In some business structures, like partnerships and limited liability companies (LLCs), there might be two or more owners.
With partnership agreements, there are strict terms that need to be followed around transferring ownership to another partner. Some agreements let you transfer ownership stakes through profit and responsibilities. Others may not allow for ownership to be passed over to an external party, so the partnership must be legally dissolved and reformed if one of the partners changes.
For LLCs, owners must buy an ownership percentage. They also need to follow operating agreements which will dictate any terms for transfer of ownership. On top of this, a transfer of ownership must be agreed upon by all of the owners.
What are the different types of businesses you can sell?
If you’ve decided to sell your business, it’s important to understand that different types of companies have different responsibilities which will affect the transfer process. If you’re a sole trader, or limited company, or a partnership looking to sell, then here are some of the things you’ll need to know.
If you are the only owner of your business, you are classed as a sole trader with a sole proprietorship enterprise. A sole trader doesn’t have a separate legal identity to being the owner of their company, and there is no legal distinction between their personal assets and those of the company. Because of this, sole traders cannot sell their right to own the business — but they can sell the company’s assets.
If you’ve sold your business’ assets to another person, the sole proprietorship dissolves and the new owner can create a brand new business structure. It could be another sole proprietorship, or they could set up a partnership or limited company.
To sell your business’ assets to a buyer, a business valuation will need to be carried out to determine a price for the assets. A contract must also be created to record the cost of each asset.
Businesses that have two or more business partners who share responsibility for the company will have a partnership structure. The profits of the company will be split between the partners and all business decisions must be agreed upon by all partners.
When the company was started, a partnership buyout agreement may have been drawn up and this will make any future changes in ownership much easier. This is because the agreement will detail what the terms are for one partner to transfer their ownership. It should also define whether they can sell their ownership to an outside member, or whether it can only be transferred to any other remaining partners.
With regards to the cost of the sale, the agreement should outline how the value of the partnership share will be determined. For example, it could be worked out by looking at gross sales, net profit, or long-term investment.
A partnership agreement also protects against other members of the company selling parts of the business without the consent of the other members. They will be able to do this if there isn’t a legally binding agreement in place; this often occurs when several partners decide to buy another partner out of the company.
Limited companies are when an organisation is set up to run a business. They differ from sole traders and partnerships as all limited company finances are kept separate from any personal finances. Once the tax has been paid, any profits can be shared out to shareholders via dividends.
The two types of limited companies:
- Public Limited Company (PLC) — Shares for a PLC can be bought or sold using a stock exchange.
- Private Limited Company (Ltd) — Shares are not available to buy through a stock exchange.
To sell your ownership of a limited company, you have the option to sell your shares or sell the company’s assets.
- Selling your shares — If there is more than one owner of a limited company, all owners must agree to the sale of shares. When the shares are sold, the company’s assets and liabilities are transferred along with the company.
- Selling assets — Rather than selling your shares, you could sell the assets of your company directly to the new owner instead. These include things like equipment, furniture, fixtures, inventory, and investments.
Whichever method you choose, selling shares or assets will transfer any liabilities to the new owner too — this includes any outstanding debts or loans, salaries and taxes. As the seller, you’ll want to get your company’s liabilities into good order as this can be something that can affect a buyer’s decision.
How to prepare your business for sale
When it comes to selling your business, you’ll benefit from having a structured and organised approach. There are some key steps that you should follow to ensure that the transaction runs smoothly.
1. Make your business appealing to potential buyers
To attract the attention of potential buyers, it’s a good idea to make your business as enticing as possible.
To put your business in a good position before going to market, you can:
- Organise your paperwork — Getting your records in order will help you in the long run, as you’ll likely be asked to produce these for a buyer to assess. It’s also worth organising any contracts and other paperwork too.
- Update any accounts — Similarly to getting on top of your records, updating any accounts and financial records at the start of the process is a good idea. It will give potential buyers an accurate picture of how the company is currently performing.
2. Have your business valued
Before you even come close to entering negotiations with a potential buyer, you must know what your company is worth to get a fair deal.
Your business’ worth is calculated by looking at more than just its assets and profit. Staff, liabilities, reputation, prospects, the current market, and other factors will affect the price that a buyer will be willing to pay.
Striking the right balance is key. You don’t want to propose a figure too low and undervalue your business; you also don’t want to overcharge, however, as it could deter potential buyers.
For more guidance on how to find the perfect price, take a look at our guide to valuing a business.
3. Find a buyer
When you’ve got an idea of how much you want to charge for your business, you’re ready to go to market to locate a buyer.
Despite naturally thinking it’s a good idea to cast a wide net to make people aware of the sale of your business, you might want to consider some more confidential steps instead. Your competitors may want to pry into your business’s inner workings and financial situation, so taking a more reserved approach can protect your business in the long run.
If you haven’t made your decision to sell the business common knowledge amongst your employees, it can assuage their concerns about job security. So, it’s best to let them know as soon as possible to avoid word of mouth.
To help you find the right buyer, hiring a business broker will make advertising and the process of selling much easier. The only downside to this is that they are known to miss-sell businesses and use unsolicited tactics. Always do your research and read a broker’s terms and conditions thoroughly to make sure that you’re in the best hands.
4. Agree to the terms of sale
It’s important to have all the terms of the transaction in writing, as this will help to make sure that both parties fully understand what they’ll be receiving. It’s worth including the following information:
- The date the ownership will be transferred
- Payment method
- Payment plan (if there is one)
- A contingency plan if the buyer fails to complete the purchase
Agreeing on the above will help both the buyer and seller to avoid disagreements further down the buying line.
5. Complete the Purchase of Business Agreement
A Purchase of Business Agreement is a contract used to confirm the transaction of the ownership transfer.
It should contain all the details found in the terms of the sale, along with additional information regarding any other clauses agreed upon. Since the Purchase of Business Agreement contains a lot of precise information, it’s recommended to have a solicitor help you with this step so you can be sure that everything that needs to be covered, has been.
6. Let your team know
If you’re selling a business where you’ve employed people to work for you, the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) may come into effect. TUPE is a set of rules put in place that provides rights to employees when the business they are employed by changes ownership.
If TUPE applies, your employees will be transferred, along with your business, to your buyer. They will still work on the same terms of employment as before, unless the sale of the business results in redundancies. In this situation, a fair redundancy process must be followed.
TUPE also means that there is specific information you must let your employees know about the business ownership change. You’ll have to let them know in writing that:
- A change in ownership will be happening
- How the change might affect them
- How the transfer will be carried out
- Details around any internal reorganisation
- Inform HMRC
The final step in selling your business is informing HMRC of your decision.
If you’re planning to retire or stop working after the sale, you will need to cancel your Class 2 National Insurance contributions via HMRC.
There are also some other key actions you must take, but these vary depending on what type of business you’re selling.
- Complete and submit your final self-assessment for tax by the deadline. This can be found on the Gov.uk website
- Finalise any outstanding tax or National Insurance payments
- If you’re selling your shares, you need to complete and submit your self-assessment for tax by the deadline
- If you’re selling the entire partnership, you must submit your self-assessment and have the nominated partner fill out a partnership tax return as well
- Settle any outstanding tax or National Insurance payments
- If you’re selling the whole shareholding, you will need to appoint new directors for your company before you resign
- If you’re selling a part of your business, you must let your staff know
- Inform Companies House of any changes via the Gov.uk website
What can happen when a business changes hands?
Whether you’re selling your entire business or just a share in your company, a change in ownership is sure to cause adjustments in how things are run. To know what’s in store, it’s a good idea to familiarise yourself with what a change in ownership can mean for your business.
Changes in management
Your buyer could have a different management style to you, which is likely to result in changes to the day-to-day running for employees. New faces will also mean that new relationships will have to be formed, and this adjustment period could have a knock-on effect on productivity.
Often when a business changes hands, a new organisational structure will be implemented. Along with management changes, this change in structure could mean that employees’ responsibilities may change.
Change in supplies
Your buyer may have their preferred suppliers or service providers that they want to bring in instead of the existing suppliers. While this could be beneficial in the long run, there’s likely to be a transition period where the business will need to adjust to the changes.
A change in ownership could lead to the business taking a different direction. The new owner may want to implement a new strategic plan, which could mean creating new products or service offerings, entering new markets, or even selling to a new demographic.
Do I need to produce a business handover?
Once your business has sold, there’s still an important step in the transition process that shouldn’t be overlooked.
Creating a business handover, or offering a handover period, can help the business to continue to operate smoothly when the time comes to hand over the keys. It’ll also be extremely beneficial for supporting the new owner in starting on the best foot possible.
Typically, a business handover is a comprehensive document that details all information regarding the running of a business. Things to include could be leases and contract information, an introduction to suppliers, pricing details, processes and procedures, and more.
A handover period tends to be a set period where the previous owner will remain at the business to support the new owner as they start to run the company. Often, the exiting owner will continue to run the company, while the new owner gets to grips with the workings of the business.
While neither of these are mandatory, they can greatly benefit the business by ensuring a smooth transition of ownership. The promise of either a handover or handover period could even help a potential buyer make up their mind over purchasing a company.
Handing over your business
Selling your business is a big step, and the process can seem overwhelming. That’s why having a clear handover plan in place can help to make the process feel less daunting, as well giving your business the best chance to succeed with its new owner.
To learn more about business finance, visit our business guides page. Or, if you’re looking to find out more about business loans, mortgages, or asset finance, get in touch with the Bionic team today.