Every business owner will at some point ask themselves whether or not to sell the business they will have worked hard to build. It might be on nearing retirement, ill-health, a well-timed approach from a competitor or simply the desire for a new adventure, but whatever the reason there are a few things business owners need to keep in mind.
The best time to sell a business is when it can achieve the highest price, and that is usually driven by a successful trading record, increasing profits and the potential for future growth. It is a process that ideally should not be rushed, starting two to three years before the preferred exit.
And given that it can take up to 12 months to complete a sale and that the acquiring business may well ask you to manage an orderly handover of your own business over a six to twelve-month window, that can leave just 12 months to get the business into sale shape.
Selling a business will for most people be a once in a lifetime event, and there will be other considerations over value that will need to be considered. These might include what happens to staff, how the business might change under new ownership, and any tax implications following the sale. It is a complicated process and one where specialist advice and guidance is needed.
The timescale for a sale is a primary consideration. That includes thinking about your own timeframe to exit, the valuation you hope to achieve for the business, and the wider market conditions in your own business sector.
The first step will be a pre-sale ‘tidy-up’ to get the business into sale shape. This will typically include the following:
- Ensuring customer and supplier contracts are all up to date
- Ensuring employees all have contracts and that there are no outstanding employment issues
- Reviewing the business tax position and resolving any taxation issues with HMRC
- Focussing on cost control to maximise profitability
- Preparing financial information and management accounts that a buyer will need to see well in advance
- Looking at eligibility for tax reliefs on the sale
- Reducing, where possible, working capital requirements
- Extracting surplus assets from the business, if appropriate
It is important to be able to sell ‘blue sky’ growth opportunities for any would-be owners, and this pre-sale tidy-up can help you to spot those opportunities and make them easier to evidence to buyers.
There are various sale opportunities: a trade sale to a competitor, a management buy-out or a new management buy-in, a sale to a private equity investor, or a recapitalisation that allows for the business owner to take out part of their equity but retaining a stake and role in the management of the business. For larger businesses a flotation on the stock market is also an option.
Finding a buyer is not always straightforward and this is where specialist corporate finance advisers will add value to the process. They will look at and advise on the best approach and options to secure the highest value. They will work on your behalf to find suitable buyers, developing in the first instance a list of potentially interested companies for discussion. Once a buyer has been found, your corporate finance adviser will manage the sale through negotiations, due diligence and legal documentation through to final completion.
Occasionally a sale can collapse, even very late in the process. Understanding the reasons why a sale can fall through and, where possible, addressing them in advance can help prevent a failed deal. Reasons include issues that arise via the due diligence stage, financials not being what was previously advised, the risk of losing key staff, adverse changes to the wider economy, adverse changes in legislation, and unrealistic vendor expectations.
Tax planning for the sale also plays an essential role in maximising your net personal cash once the deal is done and HMRC takes their share. The overall value you receive after tax will not just depend on the gross proceeds, but also on how the sale is structured. Is the price fixed on sale or is an element dependent of future performance? Also, the form of consideration, is it as cash, loans, shares or a combination?
Entrepreneurs Relief (ER) gives a 10% Capital Gains Tax (CGT) rate on qualifying sales meaning ER can save up to £1m in CGT. The ER rules changed in October 2018 so checking and planning ahead to make sure your business sale would qualify is worthwhile. A key change was an extension (for sales on or after April 6th 2019) to the qualifying ownership period for ER from one to two years, so if changes are needed to your business structure this cannot be left to the final 12 months phase. Pre-sale tax planning can also involve family members or potentially Trusts.
“What next?” is an important question when planning to sell. Depending on your priorities, by looking ahead to longer term aims and plans when structuring the sale, a more tax efficient result may be achieved overall. Also, after the sale whether it is the investment of surplus cash for your pension fund or making lifetime gifts, taking professional finance advice is critical.
Darren Hurdle is a Director in the Corporate Finance team at accountants, business and financial advisers Kreston Reeves and can be contacted by email: firstname.lastname@example.org or telephone: 0330 124 1399