You will have a timeline in mind for a sale, but timing is generally dictated by market conditions. The best indicators of when to sell are the financial climate, potential buyer profiles and market trends.
Early planning will ensure that you have the right structures and processes in place to maximise success when conditions are right. Begin with your ultimate goals – the price you wish to achieve and when you want to sell – and then work backwards to how you are going to get there. Your aim is to create a valuable, viable business that is attractive to potential purchasers.
Getting the basics right is of course important, including sales and customers, brand and reputation, processes and infrastructure, and profits and cash flow. You should also put in place a strong management team, who can both add value to a business and assist with preparing for sale. They can develop specific areas, for example, a sales director will focus on building client relationships and improving sales, while a finance director will put in place robust financial process, improve cash flow and oversee expenditure. This will give you more time to work on the sale and prevents the business from being damaged due to a lack of attention. They also provide the new owner with continuity after the sale, which should enable you to exit more quickly, and could even become a potential purchaser via a management buy-out with venture capital funding.
Bear in mind that your business is only worth what the highest bidder will pay. Your view of this may be very different from the view of a prospective buyer, and a business that is heavily dependent on one person, product or customer may be difficult to sell. If the business is seen to revolve around you as the business owner, it makes the business less attractive and less valuable. A strong management team supported by a strong brand and reputation shows a strength and depth which is attractive to potential buyers.
Retaining good individuals requires a considered incentivisation package both pre- and post-sale. This will depend on the industry sector, the size of the business and the individuals themselves. Some will prefer cash bonuses, which can be expensive. A less expensive alternative is a share option plan, which is only available to limited companies. The most common is the Enterprise Management Incentive Scheme (EMI), a highly flexible and tax efficient scheme designed specifically for smaller companies, with recipients selected at the employer’s discretion.
Preparation for a sale
Historic accounting facts are important but the keys to the sale price are current profitability, future earnings and potential risks arising from change of ownership, for example loss of customers. A business that relies on a few customers can be considered high risk and therefore less valuable. Spend time improving profitability, minimising risk and working on future earnings forecasts.
As the proposed sale window approaches, review every facet of the business and address any problems that could occur during the sale process or could devalue the business, whether legal, accounting, tax or environmental issues. No-one will want to acquire a business with an outstanding VAT enquiry or employment tribunal issue, at least without a price reduction. Carry out an internal due diligence exercise to see what skeletons a potential buyer’s due diligence would discover, and then resolve them.
When preparing for sale, remember to look closely at business ownership. Many people assume that they will only have to pay a rate of capital gains tax of 10 per cent, as entrepreneur’s relief will apply. It is important to remember that shares in trading companies can be tainted for entrepreneur’s relief purposes by substantial non-trading activities such as owning investment properties or activity management of surplus cash. As part of the review, keep an eye on non-trading activities that may need to be stripped out of the business before marketing. For example, a shareholding spouse who does not work in the business will not be entitled to entrepreneur’s relief.
The most important part of selling a business is patience. Selling takes time. It is important for the owner to continue to operate the business as if it was not for sale, as well as to understand that businesses do not sell overnight and many deals fall through. The more prepared your business is for sale, generally, the faster it will sell.
Many owners put in decades of hard work building their business, only to throw away some of the rewards by failing to consider the sale process properly. IAIS have specialist knowledge in the field of selling businesses for clients so contact us at the earliest opportunity so that the best tax options can be considered.