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...
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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.
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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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