BUSINESS EXIT READINESS

Preparing a business for sale or investment, or exit readiness, is a crucial process that can significantly impact the value achieved.

We explore some of the key areas for businesses to consider in a competitive market to ensure that they are well-prepared with packaged financial information and a competitive advantage.

1. Positioning

Whilst no two businesses are the same, certain factors will universally boost buyer confidence. These factors enhance the attractiveness of a business which in turn makes it a premium asset and drives a higher valuation. Key considerations to better position a business include:

• A strong revenue model which is welldefined, consistent, and transparent to help the buyer understand the business and build trust. Distinguish between recurring, repeat, and one-off income, and highlight where it is contractually underpinned.

• Building an economic moat to establish a defensible market position through reputation, intellectual property, innovation, technology, or know-how.

• Demonstrate understanding of the addressable market to ensure effective positioning of a business against competitors, reducing the perceived risk in projections and supporting growth potential.

• Enhancing business stability by eliminating risk to avoid price adjustments and mitigate uncertainty. Risks can stem from various sources, such as client base concentration, reliance on specific suppliers or regions, regulatory or technological shifts, gaps in governance, dependence on key personnel, or contractual terms. Proactively assessing and managing these risks not only prevents buyers from leveraging them during negotiations but also showcases that a business is well-managed.

2. People

For most businesses, people are the most important asset. Identifying and incentivising members of the team who are key to your growth and exit plans is essential to achieving the best terms from a sale.

Effective incentive schemes help to drive growth, attract talent and facilitate succession planning, which ensures flexibility over the type of deal and role an owner will play post-completion. However, it’s worth remembering that not everyone is motivated in the same way and not all incentive plans are universally available.

3. Financials

In a sale process, financials will come under significant scrutiny as buyers and investors will often base their offers on revenue or profit, so it has a direct impact on valuation. It’s therefore vital to make sure that financials inspire confidence and support the sales narrative an owner wants to communicate.

• Clean management information isn’t just about compliance. It also sends an important message to buyers or investors –that it is a professional and well-managed business. Taking the time away from the spotlight of a process to confirm revenue recognition policy, cost allocation, writeoff bad debts and make the appropriate provisions means numbers are presented with confidence.

• Optimising working capital by improving cash collection, negotiating better terms with suppliers and shortening stock holding cycles can add significant value, but it needs to be started early to be effective. Buyers and investors will want to make sure any improvement is sustainable and will thoroughly conduct due diligence on a company’s working capital needs.

Commissioning vendor assist or diligence brings a number of benefits to sellers. By preparing these reports in advance, it gives businesses the opportunity to address potential issues or misunderstandings before a process starts.

David Hawley, Tax Partner

+44 7528 970114

4. Data

Rikesh Patel, Corporate Finance Director

+44 7813 325516

In a world where data is becoming more important, investing in data quality can help to evidence growth, enhance the value that someone is willing to pay and drive a smoother transaction process.

It is therefore important to ensure data is effectively captured to provide insight into our KPIs and allow comparisons with competitors to evidence strengths and future opportunities.

5. Tax planning

Selling a business in whole or in part is a significant lifetime liquidity event. It is therefore important to optimise the posttax returns. There are two key aspects to consider:

• Ensure that ownership structures, shareholdings and share rights are in place to permit disposal with the benefit of valuable capital gains reliefs, such as Business Asset Disposal Relief (BADR).

• After the transaction, a personal balance sheet will show a very different picture: most of a shareholder’s wealth will be in cash rather than company shares. Cash does not qualify for valuable inheritance tax reliefs, whereas shares in a trading company may currently do, so it is important to consider personal and family wealth planning needs. www.rsmuk.com