“For many business owners, a large proportion of their personal wealth may be tied up in the business. Some are able to take profit out during their working life… but many need to crystallise that value to fund their retirement,” says David Emanuel, partner at law firm VWV and head of its family business team.
Over time, some owners wonder if they have it in them to carry on. Looking for someone to buy them out is a solution which also allows them to realise the value in their business. There’s a variant too, in which external investors take a stake with a view to exiting within three to five years. From Mr Emanuel’s perspective: “This offers owners the opportunity to build significantly higher value while postponing the exit.”
Mr Emanuel frequently sees owners wondering whether the next generation want to take the business on. “The thought of passing the business to the next generation is attractive,” he says. “But in practice, successful transfers between generations are rare.”
Sometimes an offer comes in at the right moment and selling becomes an option. What do you do? Mr Emanuel’s first response is to take advice. “Informal contact, particularly where there are personal relationships with potential buyers, can sound out interest.”
He has a note of caution though: “Do not underestimate the potential adverse reaction of staff, customers and suppliers to rumours of a sale. Maintaining confidentiality for as long as possible is a key feature of a successful exit.”
Professional help is important too. Accountants, solicitors and specialist corporate finance advisers can all help to formulate a plan for confidentially marketing a business, valuing it and preparing it for sale.
“Be aware of what your business should be worth,” says Mr Emanuel. “Valuations are normally based on a multiple of earnings, or, where the business has significant capital or working capital assets, net asset value plus goodwill. A variation is an assessment of future cashflow, discounted for early payment.” He emphasises that professional advice should be taken on the appropriate calculation.
Tax matters Tax planning needs to be looked at early, for example because capital gains tax is charged at 20 per cent on the sale
of shares in a trading company. If entrepreneur’s relief is available, this can be reduced to 10 per cent for the first
£1 million of lifetime gains. Mr Emanuel adds that selling assets, rather than shares, is generally less tax efficient for sellers, but may need to be considered if a buyer wants an asset-only sale, perhaps where there is some residual liability in the business they do not want to take on.
Estate planning You may congratulate yourself on selling your business at a tax rate of 10 per cent, but if you die shortly afterwards and HMRC takes a further 40 per cent for inheritance tax, those left behind will be less happy.
Is the business sale ready? During a sale, a buyer will usually ask penetrating questions about the business. Mr Emanuel recommends having systems and paperwork in place to demonstrate a well run business and prevent suggestions of price reduction.
The first step in selling, Mr Emanuel says, is to market the business: “The firm’s accountants or specialist corporate finance advisers will help put together a sales memorandum and circulate this (on a no names basis initially) to potentially interested parties.”
A non-disclosure agreement should be part of the process.
Once a buyer has been chosen, next are the outline commercial terms of the deal and – ‘Heads of Terms’. These are “non-binding in most respects, but they provide a framework for the negotiation of the deal from which the parties should not normally stray, other than in exceptional circumstances.”
Then there is due diligence. This is the process by which the buyer seeks to find out about the business, its assets and liabilities, trading relationships and employees. Sellers often underestimate the amount of work this generates, says Mr Emanuel.
The penultimate stage is the sale agreement, where the main contract will be drawn up by the buyer’s solicitors to be negotiated with the seller. Mr Emanuel says most of this will deal with risk apportionment – a hidden tax liability or an employee claim after completion for something that happened while the seller was in charge. These issues are, he says, dealt with through a process of warranties – in effect, guarantees.
Last comes completion, where the documents are signed, monies paid and the business transfers.
A sale usually takes several months and a lot of effort.
Mr Emanuel has a last piece of advice: “Owners often have mixed feelings about leaving behind a business they created and have run for years. So think about what is coming next, rather than what has been left behind.”