If you're thinking of selling in the next few years, the most useful work starts well before any buyer is involved. A buyer's advisers will test how far the business depends on you, and how far its figures can be trusted. Both take time to change, and both can be changed with enough notice.
This guide covers the year or two before a sale. For the steps of the sale itself, in order, see our checklist for selling your business.
Why a year or two
A buyer judges the business on its recent record, so the figures you produce from now on are the ones they'll look at. Changes such as a new manager or new customer contracts also need time to settle before a buyer will give them any weight.
Tax is the other reason. Business Asset Disposal Relief has conditions that must be met throughout the two years before you sell, so if you hope to claim it, check now. Our guide to Business Asset Disposal Relief sets out the conditions, and your accountant can tell you whether the way the business is owned and run needs to change first. Our readiness check gives you a quick first view of where the business stands.
Make the business run without you
It's often the first thing a buyer looks at. A buyer is paying for profit that carries on after you leave. If too much of it rests on what you know and who you know, the buyer either pays less or ties more of the price to you staying on.
- Build a manager, or two, and let them make decisions while you're there to back them.
- Introduce others to your biggest customers and suppliers, and let them own the contact.
- Write down how the important things are done, such as pricing and the month-end figures.
- Think about how to keep key staff through a sale, for example with a bonus for staying.
- Take two weeks off and see what lands on your desk when you're back.
Spread your customers
If one customer brings in a large part of your sales, a buyer will ask what happens if they leave, and the answer may show up in the price. The same goes for relying on one supplier.
A made-up example. Two businesses each make £200,000 profit on sales of £1,500,000. In the first, one customer brings in £600,000 of sales on a contract it can end at a month's notice. In the second, no customer brings in more than £100,000. A buyer will see more risk in the first, and that tends to mean a lower price, or more of it paid later.
- Work out what share of sales your largest customers made up in each of the last three years.
- Put your growth effort into winning new customers, not only into selling more to the biggest.
- Put your main customers on written terms, and check what happens to them on a sale.
- Find a second source for anything only one supplier can provide.
Income that repeats
Buyers value income they can predict. Service contracts, subscriptions, maintenance agreements and regular orders from long-standing customers all count, provided you can show them. Useful evidence includes the following.
- Signed contracts, with their end and renewal dates.
- How many customers you keep from one year to the next.
- The share of each year's sales that came from repeat customers.
- A full order book, or work already booked for the months ahead.
Accounts a buyer can rely on
Buyers and their advisers want to believe your figures. Quick fixes to lift profit before a sale, such as cutting spending the business needs, tend to be spotted and can cost you more than they add.
- Produce monthly management accounts that agree with your year-end accounts.
- File accounts and returns on time, and keep VAT and payroll up to date.
- Keep personal costs out of the business, or list them so they can be added back. Our guide to how to value a business explains the adjustments buyers make.
- Make realistic provisions for debts that may not be paid.
- Keep stock and the money customers owe you at sensible, steady levels.
- Base any forecast on evidence, and expect to be held to it.
Contracts and what the business owns
- Put informal arrangements with customers and suppliers into writing.
- Check contracts for clauses that let the other side end them on a change of owner.
- Note when important contracts expire, and renew them on good terms if you can.
- Make sure the company, not you personally, owns its name, website, domain names and any software. If the brand matters, consider registering it as a trade mark.
- Check licences, permits and insurance are current and in the company's name.
- Settle any disputes you can, and keep a record of any that remain.
Your team's paperwork
- Every employee should have a written statement of their terms. The main part is due on their first day and the rest within two months.
- Right to work checks should be on file for everyone, with copies kept during their employment and for two years after.
- Workplace pension duties should be up to date, including re-enrolment, which comes round every three years.
- Key staff should have contracts that cover confidentiality and say the company owns what they create at work.
If you use self-employed contractors who work much like employees, ask your accountant to check their status now. A buyer's advisers will ask, and it's better answered early.
Property
If you rent, look at how long the lease has left, including any break dates. Check whether it has the protection of the Landlord and Tenant Act 1954, which usually lets a business tenant stay on when the lease ends, or whether it was contracted out of that. A buyer will also want to know whether the landlord's consent is needed to transfer the lease, or to a change in who owns your company.
If you own the building, decide early whether it goes with the business or stays with you and is let to the buyer. That choice affects both the price and the tax, so take advice before you talk to buyers.
Company records
- The register of members should be up to date and match what Companies House shows.
- Past share issues and transfers should be properly documented.
- Minutes of board meetings and records of shareholder resolutions must be kept for at least 10 years.
- Directors must verify their identity before Companies House will accept the confirmation statement, and people with significant control must be recorded there.
- Read your articles of association for any rules on selling shares.
- Pay the data protection fee to the Information Commissioner, unless you're exempt.
A vendor review
A vendor review means asking advisers to look at the business the way a buyer's advisers would, before you go to market. It can cover the accounts and tax, and often the legal paperwork and the way the business runs.
It comes in two sizes. A lighter review is for your own use, to find problems while there's still time to fix them. A full vendor due diligence report is written to be shared with buyers, so each one doesn't have to start from scratch. Full reports are more common in larger sales, though they can help owner-run businesses too. A full report won't raise the price on its own, but it gives buyers figures they can trust and leaves less to argue about.
Whichever you choose, the point is the same. A problem you find and fix yourself costs less than one a buyer finds in due diligence, when it can be used to lower the price or add protections to the sale agreement.
A rough timetable
These timings are a guide rather than a rule, and they'll stretch if the business depends heavily on you.
| When | What to do |
|---|---|
| Two years or more before | Talk to your accountant about tax and structure. Start monthly management accounts, and build a manager. |
| 12 to 18 months before | Spread customers and put contracts in writing. Bring the records and the lease in order. |
| Six to 12 months before | Commission a vendor review and fix what it finds. Start gathering documents. |
| Three to six months before | Get a value range, choose your advisers and prepare a summary for buyers. |