The Deal Structures to Sell or Buy a Business for various Business Legal Entities
Firstly, let’s consider the various types of business legal entities available in the UK:
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Sole trader - a self-employed person, often trading under a business trade name.
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A partnership - a business legal entity between two or more people and again often trading under a business name.
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A limited liability partnership or LLP - a business legal entity between two or more people and incorporated in companies house as a limited liability entity. Within the extent of the law, to a degree, this entity and its owners (shareholders/members) and officers/partners receive the protection or veil of limited company status.
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A limited company - this is a legal entity set up at companies house with one or more directors and one or more shareholders. Within the extent of the law, this entity and its owners (shareholders) and officers/directors receive the protection or veil of limited company status.
There are different strategies and legal agreements used to buy or sell a business and some depend on the type of legal entity of the Seller business:
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1 & 2. Selling a Sole Trader or Partnership Legal Entity
An asset and goodwill sale is the only way in which a sole trader or partnership entity can sell their business. Simply put, this involves the buyer agreeing a value with the seller (the sole trader or partnership) and the buyer can also be a sole trader, partnership, LLP or limited company entity. Whichever legal entity the buyer is, money is paid across to the Seller in return for assets and goodwill as defined and set down in an initial heads of terms document and then a final assets and goodwill legal document. Assets are defined as fixed assets (e.g. plant and machinery, fixtures and fittings, buildings) and intangible assets (e.g. website, other intellectual property like a logo, supplier and customer contracts etc).
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3 & 4. Selling a Limited Company or LLP
This is different. There are in fact two methods:
a. You can sell the ‘Assets & Goodwill’ – as above.
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b. You can sell your shares you own in your limited company or in the case of an LLP your share or member interest.
As above, a heads of terms agreement is the first stage to agree the outline of a deal to buy a business, followed by a share sale agreement which is a far larger document encompassing many legal aspects.
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Problem:
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Raising finance to buy ‘Goodwill’ is EXTREMELY difficult as there is no collateral for the lender to take as security.
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Possible Solutions from the Buyers perspective:
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Option 1: Look into using ‘Seller Finance’ – click here for more detail.
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At first glance the idea of buying a business with no collateral may seem impossible, but in reality it can be done. Let’s examine the options. When it comes to achieving this goal, a Buyer's greatest assets are an open mind and a commitment to hanging in there despite the odds.
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Option 2: The “Enterprise Finance Loan Guarantee Scheme” is potentially Your Friend – subject to eligibility of course.
One possible avenue for buying a business with zero collateral is to opt for the Government initiated “Enterprise Finance Loan Guarantee Scheme”, which works to incentivise the bank to make a loan to a prospective buyer. Under this program, the UK Government guarantees 75% to the lender. Often, the buyer still has to put in 50% of the funding package to receive 50% via the "Enterprise Finance Loan Guarantee Scheme”; however, this money doesn’t necessarily have to be his or her money. This is where things really get interesting. The cash that the buyer uses can come from investors or even be a gift from parents in the case of young buyers. These possibilities all fall within the "Enterprise Finance Loan Guarantee Scheme” guidelines.
Let's not forget Seller Financing mentioned in option 1.
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To talk about it briefly here this is an alternative way to buy a business with no collateral, and that comes in the form of finding a seller who is willing to finance. Again, this might seem counter intuitive at first glance. But the facts are that a large percentage of sellers do agree to offer some level of financing. So in other words, seller financing is not unheard of and stands as a viable way for a prospective buyer to buy without collateral.
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Option 3: Combining the “Enterprise Loan Guarantee Scheme” program with seller financing can prove to be a powerful combination.
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Persistence Pays……..
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Ultimately, a Buyer will likely need to be rather persistent when trying to find a bank. Rejection is likely. But if this Buyer is persistent, it is possible to make the “Enterprise Finance Loan Guarantee Scheme” program work for you. We have expertise in writing business plans for Limited companies to access this finance. Producing a business plan is mandatory to access this type of funding. In-fact we often assist Buyers with producing Business Plans, as you can see on "Our Services" page.
One key way for a Buyer to keep motivated is to constantly remember that jumping through some hurdles is all part of the process since you’re trying to circumvent the traditional route of using collateral. But working relentlessly may be worth it because if you a Buyer is successful, they will have acquired a tangible and intangible asset without any collateral of their own. That is no small accomplishment.
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In the event a Buyer is reading this page, although it is intended for Business Owners/Shareholders and Directors wishing to Sell or Exit their company, don't be afraid to ask for advice from us. While it might sound very unlikely that a Buyer will be able to buy a business without collateral, plenty of people have successfully done so.
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Back to Selling a Business:
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Although the list above includes 3 options, there are other ways to Sell a business. We are more than happy to discuss these with you. Every Sellers circumstances are no-doubt unique so to find the best solution and have a free no-obligation chat with our Senior Advisers please do get in touch.
Once you have spoken with our Senior Advisers and understand the various ways you can sell your business, should you then want us to help you to market and find a Buyer please again let us. This is one of our client's most used services these days. To understand how this service works you can click here to be taken to our "Do I want to Sell my Business?" page which has a section explaining the service we offer and why we are different to other Sell Side services out there.
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