Malcolm ZoppiSun Oct 15 2023

Selling a Business as a Going Concern: Essential Steps for a Successful Transition

Conducting due diligence, addressing legal aspects, and considering employees’ well-being are essential factors.

Selling a Business as a Going Concern: Essential Steps for a Successful Transition

Selling a Business as a Going Concern

Selling a business as a going concern is the process of transferring ownership of an operational company to a new owner while maintaining its continuity and financial stability. This allows the purchaser to take over an established business with its existing contracts, assets, and employees, making it easier for them to hit the ground running and navigate potential challenges smoothly. Whether you are the seller or the buyer in this process, it’s crucial to understand the legal aspects and financial implications involved, as well as the roles and responsibilities of each party.

An array of factors and elements need to be considered when selling a business as a going concern. These include conducting due diligence, transferring assets and properties, addressing insolvency and liquidation issues, and handling contracts, leases, and legal actions. Furthermore, it’s important to recognise the value of intellectual property and having a plan of action for employees and staff during the transition.

As a business owner looking to sell your company or an entrepreneur aiming to acquire a new venture, understanding the process of selling a business as a going concern can be a game-changer. By acquainting yourself with and implementing the necessary steps and procedures, you will contribute to a smoother and more successful transaction overall.

Key Takeaways

  • Selling a business as a going concern involves the transfer of a viable business to a new owner while maintaining continuity.
  • Conducting due diligence, addressing legal aspects, and considering employees’ well-being are essential factors of the process.
  • Familiarising yourself with this process can lead to a smoother and more successful transaction for both the seller and the buyer.

Understanding the Concept of Selling a Business as a Going Concern

When selling a business as a going concern, you are transferring a business that is expected to continue operating for the foreseeable future. This type of sale allows the new owner to seamlessly carry on with the existing operations, maintaining the same kind of business as the previous owner.

The term going concern is an accountancy term that implies a business is financially stable, with a reasonable outlook for at least the next trading year. In this context, the business should not be exposed to liquidation or any other kind of insolvency proceedings or planning to undergo such processes anytime soon.

One of the key aspects to consider in such a sale is the Transfer of a Going Concern (TOGC) rules. These rules are guided by certain criteria, which if met, ensure that the transaction qualifies as business transfer agents ‘neither a supply of goods nor a supply of services’. This can save you from paying VAT on the sale, thus making it a more attractive proposition for prospective buyers.

It’s essential for you as a seller to demonstrate confidence in your business’s long-term viability and present the business in a favourable light. This means that all financial and operational aspects should be in a healthy state before approaching potential buyers.

Selling a business as a going concern provides several key benefits. For the seller, it can generate maximum value, as the buyer is not simply acquiring assets but also the potential for future profits. For the buyer, taking over a stable and profitable business can lower the risks and uncertainties associated with starting from scratch or turning around a struggling enterprise.

In summary, when you sell your business as a going concern, you’re offering a new owner the opportunity to continue your business’s legacy and operations with minimal interruption. This can be an attractive option for both parties, provided the appropriate criteria and conditions are met.

Legal and HMRC Aspects

When selling a business as not a going concern, it is essential to consider the legal and HM Revenue & Customs (HMRC) aspects involved. One key factor to pay attention to is the transfer of a business as a going concern (TOGC). A TOGC is the sale of a business, including assets, which must be treated as a matter of law, as ‘neither a supply of goods nor a supply of services’ for VAT purposes.

As the seller, it is important to determine whether your transaction falls under a TOGC. If it does, the VAT treatment will be different compared to regular sales of goods or services. In fact, TOGCs are generally outside the scope of VAT, which means that no VAT will be charged on the sale. However, there may be cases where certain assets within the business are standard-rated or exempt from VAT.

For a transaction to be considered as a TOGC, several conditions must be satisfied. Both you and the buyer must be VAT registered or eligible for VAT registration. Additionally, the buyer must use the assets to continue the same kind of business as the seller, and there must be no significant break in the business activity.

To ensure that you follow the correct VAT treatment and comply with HMRC regulations, it is crucial to notify HMRC of the sale. This can be done using an online form specific to selling your business, which covers both Self Assessment and National Insurance. Alternatively, you can call HMRC’s helpline for assistance.

Legal advice is highly recommended when selling your business as a going concern, as navigating the intricacies of these regulations can be complex. Consulting with professionals can help you avoid potential pitfalls and ensure a smooth transfer of your business to the new owner. Remember, selling a business as a TOGC requires careful consideration of both legal and HMRC aspects, so make sure you have a clear understanding of the process and the necessary actions to take.

Financial Considerations

When selling your business as a going concern, it is crucial to consider the financial aspects that can impact the value and desirability of your company on open market. By evaluating key financial factors, you can present your business in the best possible light to potential buyers.

Cash flow is a vital aspect when selling your business. Demonstrating consistent and positive cash flow will enhance your company’s perceived value, as it shows that the business is capable of generating enough cash to cover its expenses and obligations.

The profit and overall financial state of your business play a significant role in determining its value. It is imperative to ensure your balance sheet reflects a healthy financial position and your gross profit margins are in line with industry standards. This will instil confidence in potential buyers that the company is financially sound and has solid growth prospects.

Investment in the business is another crucial financial consideration. Before selling, make sure you have adequately invested in equipment, infrastructure and other assets that are necessary for smooth operations. This demonstrates to buyers that the business is well-maintained and has strategic growth potential.

The value of the business must reflect its true worth, taking into account all assets, liabilities and overall financial performance. Accurate valuation will enable you to set a fair price when selling as a going concern, without financial uncertainty and ensuring a seamless transaction process for both you and the buyer.

Examining the expenses and costs associated with running the business is vital when presenting it to potential buyers. Detailed and accurate financial records will help you demonstrate the company’s cost efficiency and its potential to generate profits, further increasing its attractiveness to buyers.

Lastly, it is important to show sufficient start-up capital in the business during the sale process. This gives buyers peace of mind that the company is backed by strong financial resources and can continue running on its own without major financial difficulties.

In summary, carefully evaluating each of these financial aspects will provide a strong foundation for presenting your business as a going concern to prospective buyers. With a clear and well-supported financial picture, you can confidently demonstrate that the business is a worthy investment with potential for future growth and success.

Transfer of Assets and Properties

When you sell a business as a going concern, the transfer of assets and properties is a crucial aspect to consider. This process involves the exchange of various items, including equipment, property, machinery, fixtures, and fittings.

In order to ensure a smooth transfer, it’s essential that you properly identify and evaluate all the assets involved. This may include creating an inventory list with accurate descriptions, as well as their current condition and value. By doing this, you can easily track which items are included in the transfer and help prevent potential disputes between the seller and the buyer.

During the transfer process, you should also discuss the ownership of any intellectual property (IP) rights such as patents, trademarks, or copyrights. This can be essential as failing to address IP rights can lead to complications in the future.

As for properties, it’s important to verify the legal status of the land and buildings involved. You’ll need to review any leases or rental agreements, as well as fulfil any pending legal or financial obligations first. Additionally, make sure to notify the relevant authorities, such as the land registry and local council, about the change in ownership.

For the transfer of equipment, machinery, and fixtures, proper maintenance records and warranties should be provided. This allows the buyer to have a clear understanding of the condition and expected lifespan of these assets. Furthermore, ensure that any necessary permits or certifications are also transferred alongside the assets.

In some cases, the transfer of assets and properties may involve staffing changes. If this is the case, you should follow the appropriate legal guidelines and requirements, ensuring that existing employees are notified and transferred, if necessary.

Comprehensive provider

Get the specialist support you need

Whether you require specialised knowledge for your business or personal affairs, Gaffney Zoppi can support you.

Keep in mind that the transfer of a business as a going concern also has tax implications, such as VAT. Understanding the tax consequences and seeking professional advice can help you navigate this process and ensure compliance with relevant regulations.

The Purchaser and the Seller’s Roles

When selling a business as a going concern, both the purchaser and the seller play crucial roles in the process. Understanding these roles can help ensure a smooth transaction and a successful handover of the business.

As the seller, your primary responsibility is to present the business in its best possible light, demonstrating its ongoing viability. You must provide potential buyers with accurate financial information, clearly showing that the business can continue to operate for at least the next 12 months. It’s crucial that you maintain possession of all premises and assets until the handover is complete, as specified in the Transfer of a Business as a Going Concern (TOGC) sales contract.

In addition, it’s essential that you remain honest and transparent about the business’s performance and any challenges it may face in the future. This ensures that the buyer is well-informed and is able to make the best decision for themselves.

As the purchaser, your role is to thoroughly assess the business being offered to ensure it meets your expectations and requirements. This involves reviewing the financial information provided, evaluating its current customer base and assessing any potential risks or opportunities associated with the venture.

It’s important to consider potential synergies with other aspects of your own business, where applicable, and to identify any areas for improvement that may have been overlooked by the seller. As the new owner, you will be responsible for continuing the smooth operation of the business once the handover is complete.

During the negotiation process, both the seller and the purchaser must establish clear communication channels, enabling open and constructive discussions about the transaction. Establishing a comprehensive sales agreement that covers all relevant aspects – such as price, payment terms, and transition support – is vital to ensure a successful outcome for everyone involved.

By understanding and fulfilling your respective roles as seller and purchaser, you can ensure a smooth transition of the business as a going concern, ultimately benefiting both parties and setting the stage for continued success under new ownership.

Conducting Due Diligence

When selling a business as a going concern, conducting due diligence is a crucial step in the process. It helps to ensure the business is financially stable and attractive to potential buyers. In this section, we will discuss the importance of due diligence and the various checks you should perform.

Firstly, it’s essential to perform a thorough financial health check of your business. This includes analysing your financial statements, assessing the company’s cash flow, as well as reviewing any outstanding debts or liabilities. A financially stable business is more likely to pass the going concern test, indicating that it can continue operating for at least 12 months.

Next, consider seeking insolvency support to further confirm your business’s financial position. An insolvency practitioner can help you identify any potential issues and suggest measures to address them. By addressing any financial difficulties early on, you can increase the likelihood of a successful sale.

Due diligence checks are a vital part of the process. These checks allow potential buyers to investigate your company’s legal and financial position before purchasing your business. You must be prepared to respond to their requests for information promptly and accurately, as this can not only establish trust but also expedite the sales process.

During the due diligence process, provide potential buyers with comprehensive and up-to-date information about your business. This includes sharing any relevant financial records, legal documents, and details of your company’s structure and operations. Transparency is key – disclosing all pertinent information can help build credibility and attract serious buyers.

In conclusion, conducting due diligence is an essential aspect of selling a business as a going concern. By demonstrating that your business is financially stable, addressing potential insolvency concerns, and performing thorough due diligence checks, you can make your company more appealing to potential buyers. This careful approach can lead to a successful sale and a favourable outcome for all parties involved.

Dealing with Insolvency and Liquidation

When your business is facing insolvency, it means that it cannot pay its debts when they become due or has more liabilities than assets on its balance sheet. In such a scenario, selling your business as a going concern can still be possible, offering the buyer a complete package to continue the operations of concern business. This section will discuss how to navigate insolvency and liquidation while considering the sale of your business as a going concern.

Despite the financial distress or impending liquidation, your business may still hold value for certain parties, such business buyers such as turnaround specialists and entrepreneurs looking specifically for struggling businesses. These buyers can see the potential in a distressed business and leverage their expertise to turn the situation around.

During the insolvency process, engaging with your creditors is crucial. It is important to communicate with them regularly and transparently about the financial situation of the company’s viability, and the possibility of selling the business as a going concern. This might help in gaining their support, as they would potentially prefer recovering more of their debt through a going concern sale instead of a liquidation scenario.

The insolvency proceedings might also involve hiring an insolvency practitioner who can guide you through the entire process, including relevant legal requirements and potential sale options for your business. Make sure to discuss your plans of selling the business as a going concern with the licensed insolvency practitioner beforehand, as they can advise on how to maximise the value of your business during this process.

In case your business undergoes liquidation, the newly introduced ‘Going Concern Sale’ (GCS) in the Liquidation Process Regulations can provide opportunities to sell your business as a complete package, with the goal of maximising value. The GCS can help retain clients, employees and suppliers during the transition, ensuring smooth operations for the buyer.

Remember, it is essential to remain confident, clear, and transparent throughout the insolvency process. Selling your business as a going concern, despite the negative going concern status, might not only help you recover a better sale price but also allow the buyer to continue the company’s operations and benefit from its established assets and clientele.

Contracts, Leases and Legal Actions

When selling your business as a going concern, it is crucial to consider the various legal aspects involved, including contracts, leases, and legal actions. This process will help ensure a smooth transition and maintain the ongoing operation of your business. This section will briefly discuss these entities and their importance in the sale of your business.

Firstly, it’s essential to review all existing contracts your business has with suppliers, customers, and employees. Ensure that these agreements remain valid and transferable to the new owner. This may involve obtaining consent from the other parties involved in the contract or renegotiating the terms to include the new owner. Additionally, be aware of any ongoing contractual obligations that the new owner must fulfil on your behalf.

Secondly, consider any property leases associated with your business. Determine whether these leases can be transferred to the new owner or if they need to be renegotiated. It is essential to clarify any legal implications, such as break clauses, responsibilities for repairs, and any restrictions that may affect the buyer’s ability to operate the business. Furthermore, consider any potential tax implications that may arise from the transfer of property leases.

Finally, address any ongoing or potential legal actions your business may be facing. It is crucial to disclose any current lawsuits or potential disputes to the potential buyer, as these may affect the value of your business and buyer’s willingness to proceed with the transaction. Ensure that you have the proper legal representation to navigate this process so that any issues can be resolved satisfactorily, protecting the buyer’s interests.

By thoroughly addressing contracts, leases, and legal actions during the sale of your business as a going concern, you can ensure a more seamless transition for both yourself and the new owner. Taking the time to understand and manage these legal aspects will contribute to the ongoing success of the business and help maintain its value in the eyes of the buyer.

Value of Intellectual Property

When selling a business as a going concern, it is crucial to evaluate the value of your business assets and your intellectual property (IP). Intellectual property includes valuable assets such as patents, trademarks, copyrights, designs, and trade secrets. These assets can significantly contribute to the overall worth of your business and play a crucial role in its market position and growth potential.

To determine the value of your IP, a thorough analysis should be conducted. Start by creating an inventory of all IP assets. This may include patents, trademarks, copyrights, and any other forms of protection for your products or brand. Remember that registered IP assets (like patents and trademarks) typically hold more value than unregistered ones. Additionally, consider the current market trends and competitive environment to assess the significance of your IP.

There are various methods for valuing IP, and choosing the right approach depends on your specific situation. Common methods include:

  • Cost-based method: This method evaluates the IP by considering the costs associated with its creation, development, and maintenance. It can be a useful starting point but may not always reflect the full potential value of your IP.
  • Market-based method: This method compares your IP assets with similar assets in the market. By examining comparable transactions, you can estimate the market value of your IP.
  • Income-based method: This method focuses on the future revenue potential of your IP. By estimating the future cash flows generated by the IP and discounting them back to present value, you can determine the monetary worth of your IP.
  • Relief-from-royalty method: This approach calculates the hypothetical royalty savings that would result from owning the IP. In other words, it estimates the value of the IP based on the royalties that you would otherwise have to pay to use it.

It’s important to note that valuing IP is not an easy task, and it often involves collaboration with IP valuation experts who can help you accurately determine the worth of your IP assets. When selling a business as a going concern, understanding the value of your intellectual property ensures that you are well-informed and prepared for negotiations with potential buyers.

Consideration for the Employees and Staff

When selling a business as a going concern, it is important to consider the rights and expectations of your employees and staff. This not only helps keep morale high but also ensures a smooth transition during the sale.

Subscribe to our newsletter

Please select all the ways you would like to hear from Gaffney Zoppi

You can unsubscribe at any time by clicking the link in the footer of our emails. For information about our privacy practices, please visit our website.

We use Mailchimp as our marketing platform. By clicking below to subscribe, you acknowledge that your information will be transferred to Mailchimp for processing. Learn more about Mailchimp's privacy practices here.

One key aspect to be aware of is the Transfer of Undertakings Protection of Employment (TUPE) regulations, which safeguard the rights of employees when a business is sold. These regulations apply to businesses of all sizes in the UK. Under TUPE, employee contracts are transferred over to the new buyer, ensuring continuity of employment terms and conditions.

As a seller, it’s important to inform your employees about the potential sale of the business, preferably before the transfer takes place. This transparency allows them to prepare for the change and understand how it may impact them. Be clear about the time frame for the transfer, if any reorganisation is expected, and provide an opportunity for consultation with employees.

Communication between the buyer and seller is crucial, especially when it comes to sharing employee liability information. This provides the new employer with the necessary details about the transferring staff and allows them to understand their responsibilities. This information should include employee names, employment start dates, job titles, and any outstanding claims or grievances.

Remember, your employees are an essential part of the business’s success, and treating them fairly and transparently during the sale process is in the best interest of all parties.

Sale of Shares in a Limited Company

When selling a business as a going concern, it’s essential to consider the sale of shares in a limited company. As the owner of a UK limited company, you hold shares that represent your ownership stake in the business. When it comes to transferring ownership of the business, you may decide to sell these shares instead of the company’s assets.

Before you engage in the sale of shares, ensure you properly value your company. This process will involve a thorough analysis of your business’s finances, assets, and future prospects. Engaging the services of a professional valuer can help provide a more accurate valuation and give potential buyers confidence in your asking price.

When selling shares, it’s crucial to be transparent with potential buyers about the company’s financial health and liabilities. This information will allow buyers to make informed decisions about the purchase and accurately assess the business’s potential. Be prepared to provide detailed financial statements, contracts, and other relevant documentation.

In the UK, the sale of shares may have tax implications, including Capital Gains Tax and Stamp Duty. You should consult with a tax professional or accountant to understand these implications, ensuring you meet all tax obligations associated with selling shares. The new owner may also need to meet certain legal obligations, such as appointing a new director or updating records at Companies House.

Once you have found a suitable buyer, a Share Purchase Agreement (SPA) should be drawn up. This legally binding contract will outline the terms of the sale, including the agreed-upon price, any conditions precedent, warranties, and indemnities. It is advisable to engage a solicitor to help draft, negotiate and finalise the SPA, ensuring that both parties’ interests are protected.

Selling shares in a limited company can be a complex process, requiring careful planning and consideration of all relevant legal, financial, and tax aspects. By being well-prepared and engaging the assistance of professionals, you can ensure a smooth and successful share sale for you and the future owner of your business.

Tips for Business Owners Selling Their Business

As a business owner, selling your business as a going concern can be an advantageous decision. To ensure a smooth process and to maximise the value of your business, consider the following tips:

1. Preparation is key: Before listing your business for sale, ensure that all financial records, contracts, and documentation are complete and up-to-date. This will instil confidence in potential buyers and make the due diligence process smoother.

2. Determine your business valuation: Understanding the value of your business is essential in setting a fair asking price. Engage a professional valuator or conduct your own research to determine an appropriate valuation based on factors such as industry trends, company performance, and market competition.

3. Maintain business operations: Ensure your business continues to operate efficiently during the sale process. This not only positively impacts the business valuation but also demonstrates to buyers that the business is capable of separate operation.

4. Seek legal advice: Consult with a legal professional to create a watertight contract of sale that explicitly records the transfer as a going concern. This is essential for handling taxes and any VAT exemptions related to the sale of the business.

5. Anticipate tax implications: Be aware of any tax implications that may arise from the sale, such as capital gains tax or stamp duty. Seek guidance from a tax expert to ensure you satisfy all legal requirements and benefit from any available tax exemptions.

6. Find the right buyer: Target buyers who have experience in your industry or are interested in expanding their existing operations. They should be able to properly maintain the business and continue operating it as a going concern.

7. Be prepared to negotiate: As part of the business transfer process, be ready to negotiate with potential buyers to reach a fair agreement. Be open to discussing terms and conditions that can benefit both parties while protecting your interests.

By following these tips, you can increase the likelihood of successfully selling your business as a going concern, preserving its value and ensuring its continued operation under new ownership.

Frequently Asked Questions

How do you value a business as a going concern?

Valuing a business as a going concern involves considering its established track record and success. There are various methods for valuing businesses, including assessing the cash flow, assets, and market approach. You may want to seek the advice of a professional or use business valuation tools to get an accurate value of your business.

What is the best way to sell your business?

The best way to sell your business may vary depending on your goals and circumstances. Evaluate your objectives and the current market conditions for your industry. Common methods include listing your business for sale on specialised websites, working with a business broker, or reaching out to your professional network.

Do I need a solicitor when selling my business?

It’s highly recommended to engage a solicitor when selling your business. A solicitor can help you navigate the legal complexities, draft contracts, and ensure all necessary documentation is prepared accurately and in line with the relevant authorities’ requirements.

What tax implications are involved in selling a going concern?

When selling a going concern, the transfer may be treated as outside the scope of VAT if it meets HMRC’s conditions. This means you would not have to pay VAT at the standard rate on the sale of assets. However, there might be other tax implications such as capital gains tax or inheritance tax. Consult a tax professional for personalised tax advice, based on your situation.

How does the transfer of employees work in a business sale?

When selling a going concern business, the employee contracts may be transferred under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). This means that their existing terms and conditions of employment will continue with the buyer. It’s essential to consult a legal professional to ensure this process is carried out correctly.

Find out more!

If you want to read more in this subject area, you might find some of our other blogs interesting:

Disclaimer: This document has been prepared for informational purposes only and should not be construed as legal or financial advice. You should always seek independent professional advice and not rely on the content of this document as every individual circumstance is unique. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person.

Disclaimer: This document has been prepared for informational purposes only and should not be construed as legal or financial advice. You should always seek independent professional advice and not rely on the content of this document as every individual circumstance is unique. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person.

Comprehensive provider

Get the specialist support you need

Whether you require specialised knowledge for your business or personal affairs, Gaffney Zoppi can support you.