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Kieran Donovan provides a checklist of things to consider for business owners who are preparing a business for sale.

Working towards an exit after many years of running your business can be a stressful process which can impact on family and business life. There are a number of considerations when selling your business - deals are complex, drawn out affairs involving due diligence, intense negotiations, countless documents, late nights and personal and professional sacrifice.

Kieran Donovan explores the ways in which business owners can prepare their business for sale, maximise the value of their business on a sale and provides practical tips and guidance on how to develop an exit strategy and navigate the sale process.

Planning and experience is key to a successful outcome

In a post COVID-19 world buyers will be more selective and opportunistic about which opportunities to target and spend time on. This more targeted approach will mean that sell-side corporate finance advisers will need to run different processes from those they ran pre COVID-19, spending more time identifying the right pool of potential buyers and working with them much more collaboratively so every party to the transaction can see the value in progressing it. Planning as far in advance as possible will therefore be essential as poor preparation can lead to an enormous waste of time, effort, energy and money. It’s much better to be on the front foot and take your business to the market on your terms rather than wait for an unsolicited or hostile approach when your business may not be in its best state to sell.

Experience is also key, more so than ever before, so take advice from specialist corporate lawyers and corporate finance accountants who know what they are doing, who can add value to the process and protect you from risk. Doing so will mean that you have a much better chance of making the process run as smoothly as possible, maximising the benefits of the sale for you, your business and your family.

Appoint the right team

The sale process is often the culmination of years of hard work so make sure you appoint the right team to give you, your business and your family the best possible outcome.

Make sure that your lawyers, accountants and other professional advisers have an in-depth understanding of your long term strategic and commercial goals and a good track record in the type of deal you’re embarking upon which will help avoid the pitfalls that can impact on its success.

Bad advice can be expensive whereas good advice can make all the difference and make all those sacrifices worthwhile. Whatever you do, don’t do it on the cheap. Take up references and ask to speak to clients who have also sold out in recent years so that you can gauge their experience of the sale process and the advice they received.

So how do you know when you’re ready to sell your business? Consider working with experienced financial planners to not only identify when you can realistically stop working and exit your business but to also identify how much money you’ll need from the sale of your business to achieve your personal financial goals. Personal cash flow planning can be a useful tool to forecast your future income, taking into account proceeds from your business sale as well as your other assets and expenditure. This will show you whether you are on track to achieve your lifestyle and retirement goals and how best to convert your business wealth into personal wealth.

Make use of the various tax reliefs

It’s also important to think about the tax-efficiency of your business and personal wealth both before and after the sale to ensure that your assets are structured tax efficiently to create the best possible outcome for you and your family.

The vast majority of non-distressed company sales prior to the COVID-19 pandemic were structured as the sale of shares as opposed to the sale of a business and its assets. This was principally driven by the desire of individual sellers to access the benefit of entrepreneurs' relief. However, the combination of the Chancellor’s announcement in his last Budget in March 2020 to reduce the entrepreneurs' relief benefit down from £10m to £1m of gain (making share sales less attractive for sellers) and the changed risk profile of transactions for buyers in a COVID-19 environment, means that more deals are likely to be structured as business and asset deals. This will be cleaner for buyers as they will be able to ring-fence the liabilities they are assuming, although they may have to accommodate liabilities with key customers or supplier or other creditors such as landlords and asset financiers in order to secure the goodwill of the business being acquired. However, it will not be as tax efficient for sellers and therefore careful tax planning pre-sale will be required to ensure that you are limiting the tax you pay on your sale proceeds as much as possible.

We’ve explored this in detail in our earlier articles on sharing company ownership and the employee shareholder and we’ll be addressing how best to deal with your sale proceeds in our final article on dealing with sale proceeds coming soon but in the meantime it’s worth remembering that there’s no point in building up value in your business only to see the tax man take more than he could have done from your sale proceeds had you structured your tax affairs differently.

Determine a realistic value for your company

Armed with this knowledge, set a realistic asking price for your business. Too high and you’ll scare off potential buyers, too low and it could look like there is something wrong with your business. That’s why it pays to retain the services of a specialist corporate finance accountant who will assess the value of your business based on current and forecast market conditions, identify the value drivers and help you evaluate the offers you’ll receive.

There’s little point in building up value in your business only to see it undone by a valuation that doesn’t stand up to scrutiny or even worse fails to properly address the value drivers in your business.

One of the key challenges after any economic crisis is how to properly value a company, particularly when prior to the COVID-19 pandemic, its financial and trading position was good, but where it has been materially impacted by the pandemic. It is for this reason that we believe that there will be a change in deal structures, with deferred consideration and earn-out mechanisms becoming increasingly prevalent so the future earnings and valuation risk becomes shared between buyer and seller, especially when there may be concerns of second and further waves of the pandemic and associated government restrictions. 

However, the increased risk of deferred consideration may create concerns from the seller’s perspective. In a volatile market, where the liquidity of the buyer may be an issue, sellers may become increasingly concerned about a buyer having the funds to pay the seller when they are due to be paid. This will lead to some difficult and potentially unresolvable discussions around security for deferred consideration, whether charges, cash deposits in escrow accounts or some form of insurance solution. This issue may increase the deal risk profile for a seller and should potentially be factored into the headline price. Again, another reason to appoint the right team to fight your corner!

Lock in and incentivise your key staff

Not only will your senior management team and key employees be key to the success of your deal, they will have also played an important role in helping you build up value in your business. In our previous article on the employee shareholder, we explored the various HMRC approved share option schemes and other mechanisms you can put in place to not only attract but also lock in and retain key employees who are going to be essential to the future success of your business, ensuring that their long term interests are aligned with your long term goals. HMRC approved schemes such as the Enterprise Management Incentive scheme can be designed as ‘exit’ only and are a great way of incentivising management for the long term as well as allowing them to participate in the value realised from the sale process.

Once you’ve agreed to sell, not only will your key employees be needed to help with the sale process, they’ll also be needed to help you whilst you’re balancing the competing pressures of managing the deal and leading the business.

A strong management team will also demonstrate to a buyer that there is no over reliance on any one person, something which will be off putting if you, your business and its relationships with key customers and suppliers can’t be separated.

First impressions count

Just like selling a house, first impressions count. Put yourself in your buyer’s shoes, does your business have ‘kerb appeal?’ It might sound obvious but keep your premises in good order, stock levels up and the business records up to date.

Work closely with your professional advisers to identify potential value issues in your business so that they can be addressed in good time so that they don’t become value destroyers and undo all those years of hard work and personal sacrifice. If issues can’t be fixed then come up with solutions on how to deal with them rather than present problems to a buyer. Whatever you do, don’t go into the sale process if you have outstanding problems in the business. Your business should have tidied up any issues before you begin, and make sure they are tidied and not pending. A buyer doesn’t want to inherit someone else’s problems.

This is where ‘vendor due diligence’ really can make a big difference to the outcome of the sale process. This is a process where a specialist corporate finance accountant and lawyer produces an in-depth report on the financial and legal health of the business to prospective buyers which will provide an independent view of the business encompassing its performance and prospects. It aims to address the concerns that may be relevant to even the most demanding buyer and provides business owners with greater control over the sale process and the timing of the sale which can help secure a higher price for the business. It can also help the process run more smoothly as it can remove the requirement for a buyer to have substantial access to the business to do their own due diligence work as they will be able to rely on the vendor due diligence report.

Vendor due diligence can also help to identify value critical issues in a business, providing you with the opportunity to address any such issues before a sale process with prospective buyers has begun. For example, prospective buyers will also want to see strong and well established systems, processes and procedures in place. Trying to sell a business without the accounts, premises and staffing structure properly organised creates the worst impression. Vendor due diligence can help a business owner focus on the quality of revenue/profitability by securing long term contracted revenues, negotiating preferred supplier status, maintaining a strong order book, developing long term customer relationships and aiming for a diverse mix of customers and markets. Your business’ history of profitability, competitive advantage, customer base, growth opportunities, brand loyalty and intellectual property rights are all valuable in the eyes of a potential buyer and any one of these items can have a negative impact on value if not dealt with properly.

You may think that selling your business in a post COVID-19 world is going to be a lot harder. Indeed, this all may look rather gloomy for sellers. However, proper pre-sale planning in the business, such as managing working capital and profitability, as well as reviewing personal cash-flow requirements and pre-sale tax, estate and wealth planning, can mean the impact of a period of likely suppressed valuations can be minimised and the impact on the overall return to sellers reduced.

Understand the buyer’s approach

Having secured offers for your business, understand the buyer’s funding and internal process and be prepared to finance part of the deal yourself by deferring some of the sale price. As we touched on earlier, many buyers post COVID-19 will rely on the seller to help them buy their business. A failure to agree to this may reduce the number of interested parties, particularly if you’re looking to sell to the incumbent management team.

Negotiating the deal to a successful completion can at times become heated and protracted so it also makes sense to leave difficult or potentially acrimonious issues to be negotiated, wherever possible, adviser to adviser, as you and the buyer will more often than not need to maintain a close working relationship pre and post sale.

Do it right

And finally, make sure you take the time and trouble to do it right. Careful preparation and using the professional resources available are the keys to getting as good a price as possible when selling your business.

Sellers will need to prepare themselves and their businesses for not only the scrutiny any buyer is likely to place them under in any deal process, but also start to re-configure their businesses for the likely future COVID-19 world to make them more attractive to potential suitors.

By following these tips to make sure your business is ready to sell, you are ensuring a successful start to the search for the perfect buyer and giving yourself the best opportunity to maximise your return and minimise your exposure in a post COVID-19 world.

Dealing with the sale proceeds

Read our article that explores how best to deal with the sale proceeds having successfully sold your business.

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