Selling a business is about much more than just shaking hands with a buyer and signing on the dotted line. Behind the scenes, there’s a lot of preparation required, particularly when it comes to tax. Strategic planning in advance of the sale can help you keep more of the proceeds, avoid unnecessary stress, and ensure your business looks attractive to potential buyers.
So, what should you be thinking about and planning for when you decide to sell your business?
Understanding entrepreneurs’ relief (now business asset disposal relief)
If you’ve heard of Entrepreneurs’ Relief, you might know it’s now officially called Business Asset Disposal Relief (BADR). While the name changed, the benefit remains the same: it allows you to pay just 10% Capital Gains Tax on the sale of your business, up to a lifetime limit of £1 million in gains. For many business owners, this relief is the difference between a decent payday and a life-changing one.
But, and this is a big but, it comes with rules.
To qualify, your business must be a trading company. That means it should be actively trading, not sitting on a pile of cash or property investments. If your business has accumulated too much cash, it could be reclassified as an investment company, which means no relief for you.
There’s also no guarantee that this relief will still be available in its current form by the time you sell. Relying on it as part of your exit plan without reviewing your position could lead to disappointment. It’s wise to review your company’s structure, activities, and assets regularly, especially in the years leading up to a sale.
Tax efficiency vs. Business valuation
Many business owners spend years running their business in a tax-efficient way, minimising profit to reduce Corporation Tax, drawing a combination of salary and dividends, and running certain expenses through the company.
While this can be smart day-to-day, it may have the opposite effect when it’s time to sell. That’s because potential buyers (and their accountants) will be reviewing your profitability closely. The lower your reported profits, the lower your potential valuation.
Some common tax-efficient expenses that can reduce perceived profitability include:
- Large pension contributions
- Company cars that aren’t essential to operations
- Director-specific perks, like private medical insurance or gift vouchers
These are all perfectly legitimate, but when preparing for a sale, it’s a good idea to separate personal or non-essential expenses from the core business operations. This gives buyers a clearer picture of the company’s real earning potential.
Financial reports buyers will want to see
When a buyer looks at your business, the first thing they’ll want is clarity. That means up-to-date and accurate financial reports. If your financials are out of date, incomplete, or overly complex, it can raise doubts or slow down the sale process.
Make sure you have the following in order:
- Profit and loss statements
- Cash flow forecasts
- Balance sheets
- Aged debtors and creditors reports
These reports help a buyer understand not just how the business has performed, but how healthy it is right now. For example, aged debtor reports show how long customers take to pay, and aged creditor reports reveal if you’re falling behind on supplier payments.
If your most recent accounts are over a year old, expect buyers to request management accounts that are more current, sometimes right up to the last month.
How to prepare to sell your business
Thinking about selling in the next year or two? The earlier you start preparing, the better. Here are some important steps to get started:
Review your financial health
Carry out an internal audit or get an accountant to help assess the current financial condition of the business. Are the numbers clean? Are the margins healthy? Are you relying too much on one or two customers?
Cut unnecessary expenses
Remove or reduce non-essential costs that may be seen as personal perks rather than business necessities. This not only improves profitability but also helps demonstrate operational efficiency.
Make the business independent
A business that relies too heavily on the owner is less attractive to buyers. Document systems, delegate responsibilities, and make sure the company can run smoothly without you.
Prepare clear forecasts
Ensure that your cash flow forecasts account for things like directors’ salaries, dividends, and any major financial commitments. Clear and consistent forecasting builds trust with potential buyers.
Work with an accountant
Getting professional tax advice early in the process is one of the smartest things you can do. An accountant can help optimise your structure, flag risks to tax reliefs like BADR, and help you present your financials in the best possible light.
Organise your reports
Don’t wait for a buyer to ask. Make sure your profit and loss statements, balance sheets, and debtor/creditor reports are ready and accurate. This allows for smoother due diligence and reflects well on the business.
Final thoughts
Even if you’re not planning to sell this year, it’s a great habit to run your business as if you are. Keep your finances tidy, track key metrics, and be mindful of how tax decisions today could impact a future sale.
Tax rules change, and buyer expectations are high. By planning ahead and getting the right advice, you’ll not only improve your chances of a successful sale, but you’ll also likely increase the value you walk away with.
Need some extra help with selling your business or your businesses finances in general? Then contact our friendly team, we’d love to help.
