A guide to Selling your Business
MGSELL FEB2017 Forum of PrivateBusiness
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An introduction to Selling your business There are many reasons why someone might consider selling their business: they may be about to retire; they may have been made an attractive offer of employment; or the business may be about to fail. Whether a business owner chooses to sell their business to their employees, business partners, shareholders or a third party, selling a business can be a complex and lengthy process. The approach to the deal will depend on the owner’s reasons for selling, and it is vital to seek professional support and advice in order to achieve the best result of a sale. This guide explains how to prepare a business for sale. It covers the legal and tax issues, how to plan the sale, the process of finding a buyer and how to negotiate a sale.
Planning the sale of a business For someone who has set up and run their own small business for many years, selling it may be an emotional experience and planning for such a change is never easy. However, it is essential that any decisions taken are rational and objective. If the business owner is about to retire, they may be able to time their retirement to maximise the sale price. Selling due to ill health may require a quicker sale, but if the business is in a good state, it need not be immediate. If the business is in crisis, a low selling price may be necessary for a quick sale before the owner loses more money, although selling it at all may be a challenge in such circumstances. Other reasons for selling include receivership, bankruptcy, death, divorce and partnership feuds. Some people simply want to sell their business because they have spotted what they think is a better idea and need the money to exploit it. Others recognise that their strength is in starting a business rather than managing a process that is ticking over steadily or slowly growing a business. On the other hand, there are many people who would like the thrill of owning and running a business, but don’t feel that they have the skills or the appetite for risk to start from scratch. Issues that should be considered in the planning process include:
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Is the intention to sell the business outright or retain a minority stake? Do any of the directors or shareholders want to retain involvement in the business in a managerial role? How will the sale affect staff and other stakeholders? How will morale be maintained? Will there be any implications for staff relating to employment protection rights under the Transfer of Undertakings (Protection of Employment) Regulations 2006?
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Understand the value of your business Value your business at a price that can’t be justified and you rule buyers out before they even talk to you. Yes, buyers know that price is negotiable – but they also have a feel for where the starting point indicates an unrealistic expectation on the part of the seller. Buying a business is an investment. And it’s an investment in a competitive market. Why would you bother to investigate a business that’s more expensive than others that offer similar opportunities? It’s not hard to avoid this mistake. All it takes is a bit of preparation – and a willingness to accept reality!
Think ahead Unless you have no choice but to sell quickly, don’t rush into a sale. Get a valuation, and consider your options. If retirement is your goal, would another year mean you need less in the retirement pot, and so can afford to sell for a more realistic price? On the other hand, would it give you time to make changes that would bring you a higher price?
Use the valuation to improve your business A formal valuation is vital, but it’s just the starting point. It’s equally important to understand how the valuation is reached. That’s what will tell you how you can make changes that will increase the value of the business to a buyer.
Value profitability, not turnover All business owners know that profit is more important than turnover – but can be tempted to forget this when setting a price for the business. Buyers are looking for a return on their investment. They’ll be calculating that from profitability, not turnover. Do the numbers add up? Sales growth is good too, but not at the expense of profits or the reputation of the business. Whatever your business, failing to understand its market value will reduce your chances of a good sale. Understanding the value of your business and using that knowledge to plan head will allow you to maximise that final pay-cheque as you walk out of the building.
Know why and how you make a profit Your buyer is making an investment. They need to understand why you make a profit as well as how you do it, so they can assess risks and opportunities for the future. Here are some starting points to get you thinking about why your business really makes a profit.
Why do customers buy from you? Understanding why customers buy is the first step to understanding why you make a profit. The most common reason business owners give is: “We provide great customer service”. Fair enough – but I’ve yet to meet a business owner who says the opposite. To get the best price for your business, you’ll need to come up with something more.
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Do you have a niche? A safe niche will increase your business’s value. Points to consider include:
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Product: have you protected your intellectual property, copyright or trademarks? Location: are you the only garden centre in a town where there’s no land available for another? Alternatively, can exclusivity be guaranteed by lease, licence, or franchise? Barriers to entry: how easy is it to start up in competition?
There are many other factors – and the strongest niche is one where there is no price competition. “We’ve got a big database...’’ No matter how large your database, it will only add value if you can show there’s a clear way to make money from it. “Next year’s looking good” Show why there is potential future profit in the business, and you’re more likely to sell. But you’ll only be paid for that potential if the new contract is signed and sealed, the new route to market already showing results. Any cash the buyer has to invest to realise the potential will come off the price they pay you.
You are not the buyer When you’re immersed in a business, it’s not always easy to see things from a different perspective. An external assessment of your business can help you identify the ‘why’ factors that will really count when you come to sell.
Using professional advisers Professional advisers will help secure the best price for a business, minimise any tax liabilities, smooth out negotiations and comply with relevant laws. They will provide an objective opinion on the sale, unaffected by any emotional attachment the owner may have with the business, and they can act as a buffer between the seller and the buyer. Anyone selling a business will need to engage with the following professional services: Financial adviser - A corporate financial adviser will help the seller consider their options and guide them through the process. Some organisations have considerable experience in disposing of businesses and may even be able to help find potential buyers. Solicitor - A solicitor will draft and negotiate legal documents and help the seller stay within the law. If the sale of the business includes property, it is advisable to use a law firm that has experience of business conveyancing. Accountant - Taxation issues are complex when selling a business and usually call for specialist professional advice. An accountant will produce the relevant financial statements and reports for the prospective buyer, and can also organise final payments when the deal goes through. Chartered surveyor - A chartered surveyor can help to ensure that the value of the various business assets is fully reflected in the asking price. In a forced sale, an accurate valuation of all assets is especially important because other factors, such as goodwill, can be harder to place a value on.
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Legal and tax issues The legal status of the business being sold is very important as it defines exactly who owns the various assets of the business.
Sole traders and partnerships If the business is owned by a sole trader, they own all the assets of the business and they can decide how the assets are sold. Similarly, partners own their share of the business assets and any sale must be agreed according to the provisions of the partnership agreement. In either of these cases, it is not the business that is sold, as the business has no separate legal existence. It is the fixed assets such as equipment and property, intangible assets such as the business name, intellectual property and goodwill, and stock that are sold.
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A number of taxation issues can arise from the sale of a business that is owned by a sole trader or partnership: The revenue from the sale of the business is classed as income and therefore the seller’s income tax status is likely to change when the business is sold. They must therefore inform HM Revenue & Customs (HMRC) of this change. Go to www.gov.uk/browse/business/selling-closing for further information. Capital Gains Tax may be due on the disposal of the assets. However, the seller may be entitled to some relief on gains under the Entrepreneurs’ Relief scheme. Go to www.gov.uk/capital-gains-taxbusinesses for further information.
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VAT may be payable on part of the transaction. Go to www.gov.uk/vat-registration for guidance.
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Depending on why the business is being sold, there may be implications for inheritance tax.
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Stamp duty may be payable by the buyer.
The timing of tax payments can be critical and it is important to seek professional advice well in advance of any potential sale.
Limited companies A business that operates as a limited company is a separate legal entity from its owners and in this case, there are two options for selling the business. The business can be sold in its entirety by selling the shares in the business. However, buyers are sometimes wary of taking on hidden liabilities in a business, so they may prefer to purchase only the assets and goodwill of the business.
Know your business
Ford wouldn’t launch a new car without knowing the MPG, CO2 emissions, safety ratings, colour choices and optional extras, or without giving this information to customers. To a buyer, your business is a product, just like that new car. Buyers need to be convinced – and it’s your job to tell them what they need to know, and make them want to buy. That means providing the right information, in the right way, at the right time.
Give the buyer confidence Buyers are weighing up risk, looking for reasons not to buy. That makes every interaction a chance to blow the deal. It’s vital to instill confidence by being prepared and having information to hand every time.
Gather the information Ask yourself what you would want to know if you were buying the business. You should get a long list which includes:
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The numbers you rely on to run the business - Leads, sales conversion, order book etc. Have them to hand whenever you meet a buyer.
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Up-to-date accounts - Annual accounts within two months of year-end, management accounts for each month by the end of the following month. Don’t risk the buyer suspecting you’re not in control of the business or worse, that that you have something to hide.
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Marketing plan - Don’t reveal the crown jewels, but do talk about what it costs to recruit a new customer and what you do to ensure people keep buying from you.
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Aged debtor and creditor lists - You shouldn’t disclose names before a deal is agreed, but an understanding of the reliance you place upon your largest customers and suppliers is crucial to price.
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Basic company information - Share, asset, HP & loan registers, VAT & PAYE records, insurance covers, lease and planning consents for properties, EPC, asbestos certificates, employee register, customer and supplier contracts, and the rest. Ensure these are compliant before you get into negotiations, to avoid delays that will cost time and money and could lose you the deal.
Buyers will require all of the above. If they ever have to wait while you compile information you should already have, you put doubts in their mind and devalue the business.
Preparing a business for sale It is not usually possible to complete all the necessary preparation in the last few weeks before putting a business on the market. There are steps that can be taken to prepare a business for sale that can enhance the price, although it may be necessary to start this process years in advance. It is important to consider the following points:
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Is it possible to reduce as far as practicable all discretionary expenditure, for example travel, entertainment and running expensive cars? Look carefully at all essential expenditure. Are there ways this can be reduced without cutting back on vital areas? Potential buyers will look for consistent expenditure patterns across the business. Set up processes to ensure that customers pay on time, so the business can demonstrate a good, creditworthy client base and a positive cash flow. Make sure that any property is well maintained. If the business operates from a leasehold property, review the arrangements for tenure and rent reviews and check the terms of your lease to ensure that it can be assigned (a third party can take over the rental agreement). Machinery and equipment should be kept in good condition, ideally with ongoing maintenance contracts. Where possible, make improvements to working capital by reducing excess stock levels and making better use of creditors. Many businesses depend on the skill and experience of certain key employees. Employees should be kept informed in order to minimise the disruption the sale may have on them. Buyers will be keen to ensure the continuity of supply, so can the loyalty of key customers and suppliers be secured with long-term contracts? If the business operates under licence, it should ensure that the licence is transferable to any potential buyers.
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The sales memorandum A sales memorandum is a brief summary and profile of the business. It enables potential purchasers to decide whether they have enough interest in buying the business to take further steps. Commercially sensitive information should be excluded, while any positives could be highlighted. Misleading statements, however, should be avoided. The following areas should be included in the memorandum:
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Business overview. Ownership. Reasons for sale. Management and employees. Assets. Financial summary.
It is usual to send a disclaimer with the memorandum and any further business details, stating that the sellers do not guarantee the information given. It is important to be clear from the outset what is being sold - shares or assets - and present this in such a way that serious buyers can quickly understand the price. Potential buyers will require detailed accounts so they can carry out their own evaluation of the value of the business.
Finding buyers for a business While business owners need to reach as many potential buyers as possible, discretion is also important in order to maintain customer and employee confidence. It may be necessary to approach buyers directly and they may come from a number of sources, including competitors, suppliers, customers, new market entrants or existing staff. Before providing any confidential information, it is important to ask a potential buyer to sign a confidentiality letter or agreement (this usually relates only to information that is not publicly available), after which the sales memorandum will be released, with a deadline for their response. If it is necessary to advertise the sale of the business, it is possible to get listed in online directories of businesses for sale such as Daltons Business, BusinessesForSale.com and RightBiz. It is also possible to use a business transfer agent or an estate agent who is experienced in handling business sales. A business transfer agent can help to locate a buyer in confidence, but they do not usually act as financial or business advisers.
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Negotiating the sale of your business As with any negotiation, it is important to set objectives for the sale of a business. The valuation is the basis for setting price objectives. There will be an upper limit from which negotiations may start, and a lower limit that usually depends on how quickly the owner needs to sell. Potential buyers could be persuaded to make an initial offer. This helps eliminate those not even close to the favoured selling price. Serious buyers can then be given more detailed information on the valuation and be invited to a series of meetings, views and inspections. Potential buyers should also clarify any conditions of purchase they specify at this stage. A Heads of Agreement document should then be drawn up. This is not a final contract; it is merely a good indication of commitment to the sale for both parties.
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