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Exceptional as Standard
Exceptional as Standard
The Referendum has passed and now we see things getting back to normal. Well as "normal" as its gets in the business of buying or selling businesses! Entrepreneurs will still want to sell the what that they have built up and bigger businesses will still want to buy them. So now is probably a good time to look at some of the things we should be doing to ensure that we are able to:
Get the best price
Avoid wasted costs
Minimise tax on the sale
Ideally we would want to have a 3-5 year plan in which to "groom" the business for sale, to have the best opportunities of achieving these goals, by:
Distancing yourself from the business
The acquirer wants the business not you. This doesn't mean that you will not be required to assist in the handover or that there may be an element of staying to achieve an "earn-out" but the buyer needs to ensure that the business will function without you.
The buyer is probably going to be a bigger business than you. They may not appreciate that you have all the figures stored in your head. They will expect to see regular management information including:
Cash flow forecasts
Sales order pipeline
Active credit control
As well as being something that would improve the day to day management of the business, such systems will make a big difference to the way your business is perceived. Improve your corporate governance and you will attract a greater interest from potential buyers.
The value of a business is in its future earnings potential. Often this is estimated using historical figures. Certainly accurate historical figures will give credibility to projections.
Consider having the year end accounts audited, if not done already.
Clear any unreconciled balances that may have been carried for years.
Reduce the number of accounting estimates. Carry out a stock take instead of looking across the stock room and saying "ooh it's about……"
Remember, the buyer will invest reasonable sums of money in financial and other due diligence. If there are weaknesses or problem areas in the financial records they will be reported back to the buyer who may well use them to negotiate the price downwards.
Remove the weaknesses now so that the results in the 2 or 3 years leading up to the sale will be untainted.
Many businesses incur costs which, while legitimate, may well be influenced by the owner/manager. These could be the type of car used for the business, the level/type of entertaining, the employment of family members. The new owners may have other ideas and may not incur these costs giving rise to greater profits.
You should think about changing these costs in order to reflect the true profitability of the business leading up to the sale or, at least, keep records of these costs to present to the potential buyer with a view to them being adjusted for in the purchase price.
Remove those that are not needed for the successful running of the business.
Review accounting policies
For example, consider disclosing Research & Development costs as capital rather than as a revenue expense.
Clean up the balance sheet
Sell surplus assets. Scrap obsolete stock. Make realistic provisions for doubtful debts.
Buyers will not pay for valueless assets.
Do you own the freehold? If so, do you want to retain this?
Are you looking to renew a lease? If so, be flexible, keep it short if possible.
Does the business own an investment property such as a buy-to-let or holiday home? Consider removing it from the business.
Not every shareholder may be as enthusiastic as you to sell their shares. Have full and frank discussions now and get agreement. You do not want the shareholders to be arguing amongst themselves just as the deal is about to go through!
Renew lucrative ones. Allow unprofitable ones to lapse or even cancel them. Take advice early from your solicitors to ensure the contracts can remain with the company if there is a change of ownership.
Ensure that the right amount of investment is made into the management team but beware of costs associated with this.
Get your accountant on board early. They will be able to advise you on the tax position and consider what action may need to be taken to mitigate the tax.
Time taken now in careful planning, cleaning up the business and concentrating on the financial results will be repaid many times over in allowing you to walk away from the business knowing that those 4 goals have been achieved.
Article written by Steve Hale