Selling your business is often a one-off life event. No second chances. Which makes it a VERY important decision. Just like selling your home for maximum value, you make sure it presents well and is in great shape. Super kerbside appeal, clean, well-documented, no peeling paint. You can’t skimp or cut corners, and nor should you sweep ‘stuff’ under the corporate carpet hoping it won’t be found.
This blog gives you some key tips so that you can sell well and sell big.
1. Prepare and plan ahead
- Who is going to buy your business – can you name the company?
- When you sell up, will your business be worth more, or less than today?
- How much, to the nearest £1m, will a buyer pay for your business?
- How much of that sum will be in hard cash?
- When exactly will your company be bought?
If you don’t know all the answers, would it add value to your life if you did? My guess is that it would.
There are three ways to exit your business:
- Bought out (nice)
- Pushed out (nasty)
- Carried out (awful)
Let’s stick to option 1 for now. Even if an unexpected buyer knocks on your door tomorrow and offers an enticing price, it will take time to get through the process because your business isn’t prepared. Accounts, financials, due diligence, staff contracts, premises, brands, products, intellectual property, etc.: all need to be put in order.
One day, you won’t be running your business. You should be in a prepared state every day, ready for the exit. On your terms of course (more on this next).
2. Know your number
It is very hard to know exactly what your business is worth. And it costs money to get a professional firm to tell you. Then there are economic peaks and troughs to consider. Plus the vagaries of the market and the fickle nature of your product or service: up one week, down the next.
Capital have worked with countless business owners over the years. Many of the owners relied on paid business ‘experts’ to tell them what their business could be sold for. In some cases, big and enticing numbers were merely bait and didn’t materialise. In other cases, owners turned down very attractive sums because of vanity and a sense of over-confidence. Neither instance is ideal.
Francis Bacon has been attributed with the saying ‘Knowledge Is Power’. Today, one who has wisdom is powerful. That’s where you need to be. Don’t rely on strangers to tell you how valuable your business is. It’s yours, after all.
Capital can help entrepreneurs uncover not just what the business is worth – but how much money you need to live the life you choose to, post-sale.
An example may help: A successful widget manufacturer (yes, a widget is a real thing) is ready to exit the business after 30 years of hard graft. The first offer is for £8.5m. The second offer is for £6m. Which one is best?
You don’t know yet, because information is missing. The potential buyers, and the selling agent, plus the accountant and lawyer, haven’t asked what the owner NEEDS from the sale. If they need £12m then both offers should be rejected. If all they needed was £4m then perhaps they could have sold five years ago.
If you are a business owner, then you owe it to you, your family and your employees to discover what your personal number is. Only then are you empowered to sell from a position of wisdom and strength.
3. Get professional help – a good fit for your business
Good businesses aren’t sold from cards in newsagent windows. That’s for bicycles. Environment is everything.
Take the top auction houses as an example.
- Sotheby’s for fine art
- Christies for collectables and jewellery
- Bonham’s for watches, clocks and cars
- Phillips for modern art
The point is that whoever you choose to help to market and sell your business should have expertise in your sector and be a specialist.
This rule applies to your advisory team: the law firm, the accountancy firm, the corporate finance team and the bank. Be prepared to ask tough and challenging questions. Get examples, and always ask to speak to a previous client to get the real low-down. Reflect on missed opportunities at your peril.
4. Be present
Hiring people to sell your business for you does not mean that you take a step back. Far from it.
The prime motivator is you. Everyone around you is working on a project for a fee. There is a queue of other projects waiting in line. You are simply ‘today’. If it all goes wrong for them, they walk away, lick their wounds and carry on. You stand alone, lost and forlorn.
Don’t be hands-off. Attend meetings. Read documents (every page, carefully). Ask questions. Be a pain in the neck. Your role is to be at the front, not in the shadows at the back.
Big deals can begin to feel like a snowball, gathering in pace and size. Sometimes it feels hard to shout ‘STOP’! Everyone has a financial vested interest to carry on regardless. Pressure will be put on you. Take a time out. Walk away. Far better to pay failure fees than to sell your only business for the wrong sum at the wrong time to the wrong buyer.
5. The devil is in the detail
You are selling your limited company business. But what is the purchaser buying? It is important to know (if you are a sole trader or a partnership there are no shares) so it can only be an asset sale.
Is it a share sale or an asset sale? And what about goodwill?
A clean break for you. The entire company and all liabilities sold as a going concern. Probably no need to convey or assign business premises. Employee contracts remain in place. As a seller, you can retain a lot of discretion and your employees may not be aware of the sale process. For you, no Corporation Tax if the company continues to trade. As a shareholder you may pay capital gains tax (CGT), but this could be reduced to 10% through entrepreneur’s relief.
You agree with the buyer which assets and liabilities are to be transferred. You still own the limited company and will need to close it down. Employee discretion is far more difficult. Business premises need to be transferred, which can be costly and time-consuming. If you have employees, the TUPE regulations are likely to apply, and legal advice should be obtained. You pay corporation tax on any profits made from the asset sale, and CGT on cash withdrawn as a dividend.
Goodwill (known as business reputation, and includes intellectual property)
Unlike a share or asset sale, goodwill is an intangible asset and, as a result, difficult to value with precision. This simple guide from the Clydesdale Bank is helpful.
Heads of Terms (HOTs)
You are likely to be involved in one of these documents. Some HOTs can be very, very long and full of micro detail. The HOT is there for a purpose, so you do need to read it, and even more importantly, understand it. If in doubt, don’t sign it.
6. Pricing and value
The value and worth you place on your business may have nothing to do with market reality. Your business is simply worth what a willing buyer is prepared to pay you. Much will depend on your business sector: service, retail or manufacturing, for example. You can also compare a similar business which was recently sold. Try searching www.thegazette.co.uk for current information.
Don’t let vanity and ego get in the way of a successful sale. The first heading in this blog is ‘Know Your Number’. It may help to have a range. For example, you need an absolute minimum offer of £x after taxes and fees, but a higher value of £y would be sweet. Don't ever tell a buyer your lower £x number.
Any offer in your range can be considered seriously. If all offers come in below your minimum, then your business may not be ready, your sector may be out of favour, or the general economy may be in a slump.
Try and avoid leaving yourself in a position where you have to sell at all costs. As Major General Garrison says in Black Hawk Down: “We just lost the initiative”. You don’t want that.
7. Cash is king
There is a saying that turnover is vanity, profit is sanity, but cash is king. So, when you sell your business, will the buyer give you 100% cash, or a combination of cash, an earn-out, loan notes or shares? Do you know what’s best for you and your family?
You need to know well ahead of the offer coming in.
Simple, understandable, clean, low risk, immediate and likely to qualify for 10% entrepreneur’s relief. You can get on with your new life.
As above, but if, for example, the cash is spread over five years, you still pay the full tax bill up-front. Then there is the time-cost of money. And your buyer needs to stick around.
You don’t get all of your money straight away. A proportion is dependent on future profits, sales targets or other criteria. This adds time and risk. However, your buyer may do great things which make it easier to hit the targets, and you may end up with more money eventually.
Earn-outs can be complex and there is no clean break. The worry continues and you certainly haven’t let go. You may face conflict in the future with your buyer.
Basically, an IOU from the buyer. You get paid in future instalments. You should get paid interest on the loan note. To reduce the CGT, you could cash-in your loan notes over several tax years. Loan notes come in two forms and can be highly complex with tax consequences. Tread carefully.
Ordinarily, loan notes don’t qualify for entrepreneurs relief. Some loan notes are unsecured, so beware.
Shares in the buying company
If you are happy to sell to a business, you may well be happy to invest in them for future profit potential. There is no clean break, and the share value can fall. If the shares are non-quoted, they are hard to value and illiquid. It also complicates your ability to get the 10% Entrepreneur’s Relief.
Whatever offer is dangled in front of you, be sure to know how the offer is made up. Never assume it’s going to be 100% cash.
8. Don’t exaggerate
Any sensible buyer will do detailed due diligence on you and your business. They will call your bluff. The numbers will tell the truth.
If you come across to the buyer as a blowhard, they won’t be impressed and may see you as an easy mark. Your position will weaken. If you have a solid and valuable business, but still exaggerate, then a buyer could walk away from what otherwise would have been a great deal.
9. The wrong buyer
This is the test of your core moral code. Is money in the bank and a yacht in the marina worth more to you than integrity?
A big number can lure most people. But what about your employees? Your clients and customers? Your suppliers?
Will you feel comfortable when you see a key employee in your local supermarket a few months later? Or will you hide?
The wrong buyer can do bad things to your (now ex) business. They can pillage it for profit. Or produce pollution or toxins. Or make bad or unsafe products.
Try and do the right thing for all associated parties. Check that the buyer ticks all of your boxes. Exit smartly and exit cleanly.
10. The post-sale hangover
You may well have big ideas and dreams for your immediate post-sale year. But what then? Boredom and idleness?
Perhaps another business idea crops up, or you get asked to co-invest with a good friend because of your expertise. The problem is, the business is similar to the one you sold, and it is in the same locality. What then?
Most non-compete clauses in a contract are really restrictive covenants to stop you setting up again in competition with your buyer. And yes, you could end up in a costly legal wrangle in the courts if you breach the conditions.
Restrictions encompass time, scope and geography. If you are asked by the buyer to sign one, but you don’t want to, then any goodwill value you were relying on may be scuppered.
If you do breach the covenant, you will likely face an injunction or be forced to pay damages. That’s not a happy ending, is it?
If you are within five years of selling your business, why not talk to Capital about getting prepared? We have helped a lot of companies and still act for the business owners years after the sale. Contact one of our experienced chartered financial planners for a no-obligation coffee meeting. Click here to contact us today.
At Capital, we believe that knowledge is power, and that advantage is everything.
This blog was authored by Don Fraser. Don is a director at Capital Asset Management and has been advising business owners for 40 years.