Chris Hird, Head of Corporate Finance at Haines Watts North East, discusses all of the crucial considerations when it comes to a business sale.
Selling a business is undoubtedly one of the biggest moments in any business owner’s life – it is often the culmination of many years of sacrifice and hard work, by several generations of a family. So, wanting to guarantee the best possible outcomes from the sale is an inevitability. Taking a pre-emptive approach and preparing your sale strategy in advance is vital. In an ideal world, the planning process would start at least three years before the proposed sale.
This gives you the opportunity to gain more confidence and control over the sale, whilst also allowing you the time to prove the financial stability or potential for growth within your business. Crucially, planning ahead will help you to maximise the value of your business, improving the final outcome for the shareholders. Some of the fundamental aspects to consider when getting your business ready for a sale are as follows…
Removing unnecessary costs
Taking the time to look at the cost base of your business will highlight any unnecessary/ discretionary costs which can be removed. This will go a long way when it comes to increasing the profitability of your business, and higher profits typically means higher value. Even if you’re not looking to exit your business, removing these unnecessary costs is good business practice and something I’d always recommend to clients.
Who owns what?
Whether it is leasing agreements, property leases or freehold properties, your assets might not actually be owned by who you think. Often these particular assets are in an individual’s name, while the rest of the assets are owned by the company . If asset ownership is split between different parties, this could give the buyer leeway to lower the price, or worse still, withdraw from the deal altogether. Rectifying this problem at short notice could be costly, so looking into this sooner rather than later could save you any unwanted surprises further down the line. Protecting your intellectual property Although less obvious than your tangible assets, trademarks, patents, copyright and ‘property of the mind’ could well be the most valuable assets your business owns. Time after time business owners are unaware of the intellectual property they already have. Even the name of your business should be taken advantage of and protected by registering it as a trade mark. Failing to own and/or protect, the intellectual property of your business will at best reduce the purchase price of the deal and at the worst could jeopardise it entirely. Maximising your tax position Tax can have a huge knock-on effect when it comes to your business sale. But forward planning and ensuring your shareholdings are structured correctly can place you in a much stronger, tax-efficient position. The variety of tax incentives and reliefs on offer is vast, and it could well be that you are eligible missing out. Making the most of reliefs such as Research and Development tax credits, could unlock trapped cash in your business, improving the health of your balance sheets, and in turn increasing the value of your business in the long-run. A fundamental part of this, in the case of a limited company is whether the sale is a share sale or a sale of trade and assets. Under the current rules it’s usually more tax efficient for a vendor to sell shares, especially if they qualify for Entrepreneurs’ Relief. An asset sale is often less tax efficient as (depending on the assets being sold) the company could potentially pay corporation tax on the sale proceeds, and then the individual shareholders could potentially pay personal tax to extract these funds from the company. Keep in mind that tax is usually payable on any gains made when selling a business – potentially resulting in a very hefty tax bill. However, Entrepreneurs’ Relief on a sale of shares can significantly lower your tax liability and is definitely a route worth exploring in the lead up to your sale. There has been a lot of noise surrounding a potential rise in CGT following an OTS report which recommended doubling the rate in line with income tax. It is impossible to predict when/if such a rise will take place, but it’s something you should be aware of given the potential impact it could have. Building a fit-for-purpose management team Potential buyers will undoubtedly look into the strength of your senior management team, so building the best team possible will lend you favour in the process of selling. If you’re exiting your business upon the sale, buyers won’t want to see all of the expertise and experience leave with you. Making sure your team know all the ins and outs of your strategy and can run the business efficiently without your input, or the buyers, is crucial before your exit. Are all of shareholders in agreement? If there are shareholders other than yourself in the business, you need to ensure that they’re agreement when it comes to the sale. A potential fallout between shareholders (which happens more frequently than you might think), could result in someone in your party refusing to sell. One shareholder holding the others to ransom – for even the pettiest of reasons – will cause frustration for you, and the buyer is unlikely to hang around long enough to wait for the problem to be resolved. Having a shareholders agreement in place now, is an easy way of avoiding this scenario further into the process. Preparing for due-diligence Once the sale process has begun, the buyer will typically carry out due diligence, to get a clear picture of what they are acquiring. Preparing for due diligence is vital, as there is real scope for the price of your business to be chipped down throughout this process. Make sure you have all the correct documentation and that it is all in order, whether it’s ensuring your customer and employee contracts are in existence and signed, or checking that all your returns are filed on time. The value of finding the right advisor Selling a business is a very specialist area and most business owners will only do it once in their lifetime, so having the right advisor is essential to ensure that the true value of your business is realised.
Working with an expert advisor on the sale of your business can help maximise the ultimate value, offer a strategic direction for your exit plan and can even help you find the right buyer for your business in an effective, discreet and efficient manner.
