Selling your shares in an SME

Selling your shares in a small or medium-sized enterprise (SME) is a significant step, often marking a new chapter in your business journey. It is a process that involves a variety of complex legal and financial considerations, and it requires careful planning to ensure a smooth and successful outcome. Whether you are looking to retire, move on to new ventures, or simply realise the value of your hard work, the sale of your shares should be approached with diligence and the right professional support.

Selling your shares in an SME is not just about finding a buyer and agreeing a price. It is about understanding your rights, navigating legal restrictions, and ensuring you are protected every step of the way. With the right advice, you can achieve a sale that works for you and the business.

In this blog, we discuss the key legal steps and practical considerations involved in selling your shares, helping you to make informed decisions and avoiding common pitfalls.

Understanding your shareholder rights and obligations

Before you can sell your shares, it is essential to understand your rights and obligations as a shareholder. Every company is governed by its own set of rules, which are usually found in two key documents:

• Articles of association - this is the company’s rulebook, setting out how shares can be transferred, what approvals are needed, and any restrictions on who can buy shares; and
• Shareholder agreement - if your company has one, this agreement may contain additional rules about selling shares, such as who you can sell to and at what price.

Our lawyers can review these documents for you and explain:

• Pre-emption rights - these give existing shareholders the first opportunity to buy your shares before you can offer them to outsiders. This is designed to keep control of the company within the current group;
• Permitted and non-permitted transferees - some companies prevent a sale to certain people or organisations, such as competitors or non-family members;
• Valuation clauses - there may be rules about how your shares should be valued if you decide to sell; and
• Board or shareholder approval - in many cases, you will need the approval of the board of directors or other shareholders before a sale can go ahead.

For example you may wish to sell your shares to an external investor, however the company’s articles require board approval and give existing shareholders the right to match any offer. By reviewing the documents early on, our corporate team can guide you through the process and avoid any last-minute surprises.

Valuation of shares

Determining the value of your shares is a crucial step. Unlike public companies SME shares are not traded on a stock exchange, so there is no obvious market price. There are several common methods for valuing shares:

• Asset-based approach - looks at the value of the company’s assets minus its liabilities;
• Earnings-based approach - focuses on the company’s ability to generate profits, often using a multiple of recent earnings; or
• Market comparison approach - compares your company to similar businesses that have recently been sold.

Engaging an independent valuation expert can help ensure that the price you agree reflects the true worth of your shareholding. This is particularly important if there are disagreements about value, or if the company’s articles or shareholder agreement require an independent valuation.

Finding a buyer

Once you know your rights and have a sense of value, the next step is to find a buyer. There are two routes available:

• Internal buyers - these might include other shareholders, directors, or employees. Selling internally can be simpler, as the buyers are already familiar with the business; or
• External buyers - these could be investors, competitors, or other businesses looking to expand.

When marketing your shares, consider:

• Professional networks - word of mouth and industry contacts can be effective;
• Business brokers - these professionals can help you find and vet potential buyers; and
• Online platforms - there are websites dedicated to buying and selling businesses and shares.

Our expert solicitors can advise you on any legal issues that may arise with different types of buyers. For example, if you are selling to a competitor you may have concerns about confidentiality, whereas selling to an employee may require additional agreements about ongoing involvement in the business.

If you are considering offers from both internal and external buyers, by highlighting the legal and practical implications of each option, we can help you make an informed choice that suits your long-term goals.

Legal and tax implications and considerations

Selling your shares involves several legal steps and documents, including:

• Stock transfer form - the legal document that transfers ownership of your shares to the buyer;
• Company’s statutory books - the company’s official records must be updated to reflect the change in ownership; and
• Companies House filings - in some cases, changes must be registered with Companies House.

There are also important tax considerations. For example, you may be liable for Capital Gains Tax on any profit you make from the sale. However, reliefs such as Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) may reduce your tax bill if you meet certain conditions. It is always wise to seek advice from your accountant on the tax implications of your sale, as the rules can be complex and change frequently.

Negotiating the share sale agreement

The share sale agreement is the contract that sets out the terms of your sale. Key points to consider include:

• Price and payment terms - how much will you receive, and when?
• Representations and warranties - statements you make about the company and your shares. If these turn out to be untrue, you could be liable to the buyer.
• Indemnities - promises to compensate the buyer if certain risks materialise after the sale.

A robust, legally sound agreement is essential to protect your interests and avoid disputes later on. Our lawyers can draft and negotiate the agreement, ensuring that your rights are safeguarded and that you understand your obligations. For example, if you are negotiating a sale including staged payments, you will want peace of mind as you exit the business that you will receive the money owed.

How we can help

Our expert corporate team offer comprehensive support throughout the share sale process, including:

• reviewing your company’s articles and any shareholder agreement to advise on restrictions, rights, and the correct process for selling your shares;
• providing practical advice on legal issues that may arise, whether you are selling to an internal or external buyer;
• drafting all required documentation, including stock transfer forms and the share sale agreement;
• handling Companies House filings and updates to the company’s statutory books, where necessary; and
• acting as a sounding board throughout the process, ensuring you are informed and confident at every stage.

Selling your shares in an SME is a major decision, but with the right legal guidance it can be a smooth and rewarding experience. If you are considering a sale, we are here to help you achieve the best possible outcome.

To start a conversation on selling your company shares, please contact Ian Barnard or Richard Wrightson in our Company and Commercial team on 01653 600070.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.