May of our clients are business owners these days so I asked Donald Boyd of Campbell Dallas if he would be kind enough to put together some guidance for those who may be thinking about exiting their business, take it away Donald.
At Campbell Dallas, we get asked time and time again by business owners, how much is my business worth? This tends to be a leading question, as it is obvious that at the forefront of our clients’ mind is an exit at some time in the future.
This exit could take the form of a trade sale, a management buy out/ buy-in or a variation of both.
From the point of considering a potential sale to an actual conclusion we find that the optimal period to maximise value is around 2 years.
Increasingly unsolicited approaches to business owners are appearing in the market-place and in these situations sometimes the company is not quite ready to achieve the best price or have the most effective tax structure.
There are many things to consider in preparing for a potential sale to maximise value here are some key areas we regularly come across. Being able to produce an accurate and robust management information pack gives the prospective purchaser confidence in the Management Team and visibility on current and future cash-flows.
- Are there formal contracts with customers and suppliers when were they last reviewed are they fit for purpose?
- Owned/ Leased premises can you sell/transfer without delay check the detail?
- Your key Directors/Employees are they properly incentivised and contracted to the business?
- Who is the potential buyer internal or external?
- Vat Review/Processes?
What business owners should be trying to achieve is reducing the opportunity of a price chip and additional warranties and guarantees by having everything in order and to hand.
In the years leading up to a sale, it is an opportunity to clear up some lifestyle costs that may be hidden within the Profit and Loss Account and may in fact be showing depressed profits. These may include some salaries, family costs and benefits-in-kind that are currently put through the business.
That being said, a savvy investor will ask for these to be stripped out, so they can understand the underlying profitability which will be higher and should therefore generate a greater price.
It is important business owners speak to their Professional Adviser, to ensure their structure is set up pre sale, as some of the tax planning may take one or two years to bed in, prior to any sale or change.
Finally on exiting, business owners need to ensure that there is enough left behind for a prospective purchaser to visualise some ‘upside’. Therefore a reasonable and robust forecasting system is required, so that the purchaser can answer the “If I only had question”. Typically we find that businesses who have planned for a sale, achieve in the region of 30 – 50% more for their business.
Selling a business can be a stressful time for business owners. In the majority of occasions, it will be the biggest corporate deal that they will ever have undertaken and when that is combined with disposing of something that they have created, it is not difficult to see why it can be an emotive transaction.
The Professional Adviser has to manage this process in a sensitive manner, to remove many of the stresses by project managing the transaction. It is important prior to sale, that you face your strengths and weaknesses of a particular business and this will sometimes be the individuals themselves where the business is over reliant on the principal.
It is also important that any unsolicited approach may result in a lower value than what could be achieved in the open market, you would have to ask yourself why they would offer a figure on a business that has not actually been put up for sale. Therefore it is important for a prospective purchaser to have Professional Advisers sitting alongside them in these negotiations, or indeed testing the market.
One major downside of a disposal is that it tends to turn an asset that is inheritance tax free into one that is exposed to inheritance tax, i.e. cash. It is therefore imperative that the business owner has the correct inheritance tax planning to back up the transaction.
The overarching message is to prepare yourself and your business by getting the right support and advice early from the most appropriate people.
I hope you find that useful and as always we would be delighted to get your feedback