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Top 10 Tips for Making an Excellent Business Disposal

By Colin Davison, Cranleys Chartered Accountants
mail@colindavison.co.uk
Copyright 2001-2002

Who Should Read this?

This is aimed at directors of businesses in the owner-manager or commonly known Small / Medium Enterprises (SME) sector and designed to be a, brief, 'bullet-point' reminder. The article does not aim to cover every aspect of the disposal process, that is what we are here for! Any points not understood should be e-mailed to me.
Also see: valuing a business

1. Why are you leaving?

Why are you thinking of selling? Doing the same thing for the last X years can be a bore? More time with the family? Or are you on the way up in your business? Do you have bigger fish to fry or simply retiring due to age or ill-health? These questions play a vital part in determining where to look for buyers.

For example you may feel that the business will need to access new technology, or new markets, or it has grown to a size where you are unwilling or unable to manage it. In these cases the buyer is likely to be someone with the financial and management muscle to take it forward, rather than someone of comparable size looking for a merger.

How will you sell your business - shares? Business assets? What will you be offering? Are you prepared to offer a continual input for a period of transition? Are all shareholders agreed on what is for sale (just your shares or the whole lot)? How will consideration be paid (a cash deal, or a higher, but deferred amount). Consider a management buy out and a financial institution acquiring a minority shareholding and leaving other shareholdings intact.

2. Timing

A quick sale is never going to be particularly beneficial to you? Sell when you are still enjoying things. When you have the luxury of choice you can choose when to market the business. For example in a seasonal business you would probably want to have made your profits and therefore maximise the potential sale proceeds.

Timing the sale to coincide with a newly completed set of audited accounts is always helpful as this can reduce uncertainty over the profit and assets being sold. So, a few months could well prove beneficial.

3. Tax Planning

Heard of 'Retirement Relief for Capital Gains Tax'? Tax planning is an essential part of disposal the process. It may be worthwhile deferring the sale, or selling in a particular way (possibly in 'part-disposals' in order to get full advantage of relevant tax savings). Recent changes in capital gains tax legislation affecting business disposals, and the phasing out of retirement legislation in its current form, are particularly relevant.

There may also be ways of structuring a deal to provide you, the vendor, with a revenue stream rather than just a capital gain. Each disposal method will need to be examined carefully as there will be different consequences for the vendor and purchaser. Often both are considered and the overall minimum tax achieved.

Property ownership is also vital - you do not want to get taxed down the line for something that was not explained to you at the time.

'Tax planning' ensures that you are well-informed and gives you greater flexibility in negotiations.

The sales process may take several months, so do not be over ambitious with your plans.

4. Business Valuations

This is often looked at as being a complex process - however it is not a science. The price is simply "the amount a willing buyer is prepared to pay a willing vendor".

Before embarking on the sales process you will need to have a reasonable idea of the worth of the business. It may be based on net assets, or cash generation, or a multiple of profits or some combination of these. The rate of improvement or decline in these will also be an influence. Some industries use very specific methods, such as a value per room in the case of hotels, or a % of fee income for professional practices. Profits will not always be the sole influence.

Valuing businesses is definitely an art. We will not know all of the factors in the equation, and therefore, have to best guess in most cases. Always ask yourself what you would realistically pay for it if you were in the 'buyer's shoes'.

Also consider income that the person would be getting risk free, that is, working 9-5 risk-free with a fixed salary (and holidays, benefits etc). People in such positions are likely to deduct their usual salary cost in the equation and then pay an earnings multiple on the remainder...

e.g. a business produces 70k profits and the buyer currently earns 40k.
The cost of employers NIC is 4k.

Profits 70k
Less cost lost as a result of self-employment:
Salary 40k
Employers NIC 4k
(44k)
Profits above usual earnings 26k
Multiple to apply, say, 3 times 78k i.e. just above one year's profits.

Therefore different purchasers will have very different values attached to a business. The professional advisors role is to best find the person who will place a high value on the business.

Also, you may need to consider the fact that the new owner may not need to be involved each day and minimal effort may be required.

You need to establish at an early stage your minimum acceptable price and, if there are separate elements of it, what, if anything, is negotiable or tradable. A consultancy contract for 2 years? Or sell off some non valuable items.

5. Get professional help

Seek professional help from a selling agent or Chartered Accountants like us. Advice should be impartial. Avoid selling agents who indicate an attractive valuation in order to sign up a vendor for their books and who tend to be on commission rather than a fair professional fee.

Your choice of professional advisers will need careful consideration. Ensure that they have previous disposal experience. The important thing is to be aware of what can and needs to be done. Can they 'project manage' the exercise?

At the negotiation stage, it is a useful ploy to pass the messy or confrontational bits to a professional adviser, with clear instructions as to the desired outcome. This avoids you being seen as difficult and you can blame the adviser for being too keen.

6. Clean up the business

In the months (or even years) before the sale process begins, it is essential to take a long, hard, look at all aspects of the business. In the interests of boosting profitability: Consider whether margins could be be lifted; Can non-business expenses be reduced at the expense of long term relationships? Can expenditure with a long term payback, such as an advertising campaign, be deferred?

Non-business or surplus assets should be disposed of. Purchasers will not want these so realise some cash and consider paying a pre-sale dividend (this is a standard tax-efficient method of receiving part of the sales proceeds).

Look closely at the management structure. A purchaser will not want to have to draft in a new management team if you can demonstrate that your second line management is capable of taking executive decisions. Consider a reorganisation and issue formal job descriptions and titles.

Your professional advisor should be able to guide you through many other matters involved in grooming the business for disposal (e.g. taxation, legal reviews).

7. Prepare an excellent 'sales memorandum'

This is often the only piece of information available to the purchaser after the first enquiry and it is the deciding one.

The sales memorandum is intended to be a selling document and should therefore show the full potential of the business. Its purpose is to bring a purchaser to the negotiating table. It should, of course, be truthful and its contents capable of independent verification.

Presentation is extremely important. Product literature, charts and tables are much more relevant than pages and pages of management accounts. Clarity of language is far more important than technical detail or precision.

They may need to be carefully drawn up for the particular purchaser in mind depending on how the business may go and how diverse its offerings are.

Stress good points, but don't overlook bad. Put "health warnings" and disclaimers on the document, but bear in mind that the due diligence process will find you out if you are trying to conceal something. You will be aware of the skeletons in your cupboard and should decide at the outset how and when these will be disclosed.

It is very easy to loose a potential purchaser do no not lose their trust by hiding things that the due diligence process finds out.

8. Identifying interested parties

The process you have gone through to date may well point the way to the likely buyer profile. If you want cash from a deal it may rule out buyers below a certain size. If you are looking for a friendly purchaser who will safeguard future employment of staff and management there is little point talking to known 'asset strippers'.

In conjunction with your professional advisers you should put together a list of possible buyers. You may well hold market information about prospective trade buyers, but do not rule out prospective new entrants to the sector. Non executive directors, or specialist professional advisers, should have the ability to identify "non-trade" buyers who may be prepared to pay a premium to enter your market.

Keep your target list to manageable proportions. If you have to advertise the time drags on and you end up sending out the wrong signals to the industry as well as receiving timewasters.

9. Keep running your business

You still need to concentrate on this month's sales targets and the usual stress. Consider getting in an interim manager to help. A purchaser will appreciate this and take comfort in the knowledge that they can keep them if needed. Also the performance of the business will not suffer.

Be prepared for some downward pressure at the end of the negotiations. The cost of the due diligence has to be paid somehow!

Staff morale can suffer badly during this period if they are not kept reasonably informed, or offered the chance to buy. Even if you believe in, and practice, the mushroom theory of management, the attitude of your employees will be picked up by the buyer during pre-acquisition contact. No buyer will be particularly keen to take on a demoralised workforce without taking account of it in negotiations.

10. Good project management

Keeping control of the events is the role of a professional advisor who is aware of the deadlines and issues. By keeping in line with expectations, goals will be achieved and your business will be sold for the right money and in an acceptable time period. For smaller businesses you may wish to take on this role yourself, in which case, your advisor can brief you. Keep one step ahead and you will achieve your objectives.

Contact

Colin Davison, Cranleys Chartered Accountants
mail@colindavison.co.uk
Copyright

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last modified: 15-Dec-2001