Selling your business

33 Group

Aug 28

2 min read

The value of your business depends to a large extent on 3 things.

- How much the business is reliant on its founder

- Its profits

- Its assets

If your business is reliant on you to generate sales and you are the reason customers come, then apart from the assets in your business, there is little additional value. If it isn’t, then the price you could get depends on the industry your company is in. Typically, businesses are valued on a multiplier of profits and any difference between that value and the value of your net assets is called Goodwill.

For example, you have annual profits of £50,000 and net assets on your balance sheet of £100,000 (net assets are all assets less liabilities). Your business has an industry typical value multiplier of 4 times annual profit so you will be asking for £200,000 and £100,000 of that is Goodwill (as you are selling the £100,000 net assets £ for £).

Once you have agreed a price, you would need to appoint a lawyer to draw up the Sales and Purchase Agreement (SPA). Unfortunately, it’s not as easy as selling a house when the contract is a few pages long, a typical SPA will be between 20 to 80 pages.

You will also undertake a due diligence process, where the buyer is given access to the full books and records of the company, provided under a Non-disclosure agreement and whilst there is an element of “sold as seen” (after due diligence), you will have to provide warranties in the SPA. No business will be sold without them. This is not unreasonable as the buyer has to be protected for the unknowns that a due diligence process won’t ever show up. How deep and wide the warranties are is what takes the most time in drafting a SPA.

For example, if you are currently under HMRC investigation and haven’t told the buyer then that could lead to a tax payment after acquisition. In that case, it is a hidden liability at acquisition date and a warranty claim would follow.

The warranty period will typically be 12 months and in some cases an amount is held back from the selling price, to be held in escrow, in case a claim is made.