Selling a business is not an everyday activity for most people, but getting it right, or wrong, has a significant impact on the financial position, security, and long term viability of both the business vendor and the purchaser. As such, for many people this is a highly emotive issue which is only heightened further if the business in question is family-owned.
Integrity365 adviser, Nick Gwilliam, recently sat down with Peter Drown, Senior Partner of Beavis Morgan, to discuss the process and top considerations when selling a business. Peter has a significant number of years of experience advising companies on all aspects of their business, including, inevitably, business sales.
Here, Peter summarises the five key considerations prospective vendors should consider when selling their business.
1. Seek Expert Advice
It is important to strike a balance between the individual business owner’s thoughts about the sale, and engaging with other parties as soon as possible. Particularly if you’re talking to a third party advisor. In fact, it is often better to engage with someone impartial immediately – before any family or wider parties are involved. They will take the emotion out of the situation and help the vendor work through their own personal situation, and highlight potential pitfalls before they occur.
It’s also important that the business vendor is open with their advisor, sharing everything from the wider personal circumstances, to the details of the business.
For example, a business might receive 50% of its revenue from one particular customer. If that’s the case, then any potential purchaser will probably want assurances that, once the business is sold, the vendor won’t try and work with the customer under a different banner. That’s an extreme example, but these situations do occur and it is important to realize from the outset that everything comes out in the wash. In this scenario, the issue can be overcome by inserting a clause in the sale contract that the vendor cannot work with the main customer in future. That way there is an element of protection for the purchaser and the business is more valuable because of assurances over the stability of the business/customer relationship. So, the vendor should receive a higher value for the business than if no such clause existed.
Being open with your adviser can also ensure that there aren’t any unintentional misrepresentations of earnings or tax liabilities. Remember that any potential business purchaser will be completing their own due diligence on the business prior to purchase, so it’s important for vendors to have their own house in order before allowing others to closely scrutinise the accounts.
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2. Set Your Objectives
Before I give advice, it’s crucial that I understand the vendor’s position, and their motivation for sale. Selling a business when the owner is in ill health, looking to retire, or because they want the funds to do something else with, each require a slightly different approach. Perhaps the best advice I can give is for the vendor to be clear about their motivation for sale, and to have a firm grasp of their expected outcomes before they begin.
Admittedly that’s easier if the business is owned by one individual or one family. The more owners that are involved, the wider variety of objectives there tends to be, and so more reason for the vendors to discuss these issues between themselves. This way they have come to a collective decision as business owners, as opposed to a collection of individuals, with a clear idea of why they are selling and what they want to achieve from the sale.
3. Understand Your Target Market
Business vendors need to know their potential buyers. As with any sale, it is only worth what someone else is willing to pay for it. Therefore, it is vital to understand who you’re aiming to sell the business to, and what aspects of the business hold specific value to them.
Broadly speaking, there are four options when selling a business:
- Sell it to existing staff, commonly via an employee ownership trust or a Management Buyout (MBO).
- Sell it to a competitor, or a business within the same supply chain.
- Sell to private equity.
- Liquidate the firm. This isn’t essentially a sale, but it can be the best way to release value from a business where, potentially, the firm-held assets are more valuable than the trade.
Of course, that’s a very broad overview so please don’t treat those options as exhaustive, but it gives an idea of the different potential purchasers available.
It is also imperative for the business vendors to have an idea of who their target market is. Ideally, they would draft a list of potential buyers. Then, when ready, they might issue ‘teaser’ documents if they’re targeting a third party purchaser, which publicly confirm that the business is for sale. The absolute best outcome for a vendor is that they have more than one party that wants to buy the business, as this will drive up the price. Therefore, understanding potential purchasers and engaging with them in the right way can really improve the financial outcome for the seller.
4. Legal Advice
When selling a company, it is also important that the vendors consult a lawyer. A good solicitor will be responsible for drawing up a share purchase agreement, and the terms of sale. They’ll also outline any warranties and indemnities.
This comes back to my earlier point about being open, and fully disclosing all aspects of the business at the outset. If there have been issues in the business, a solicitor can draft a disclosure letter outlining what those issues are. It might reduce the sale value a little bit (or it might not, depending on the issue) but is does mean that, if the business suffers post-sale because of the disclosed issue, the new business owners (the purchasers) cannot make a claim against the vendors. Essentially it gives peace of mind to the vendor that when the sale is done, it’s done.
5. Tax Considerations
Tax should also be a key consideration with this type of business decision. I would suggest business vendors take advice as early as possible to ensure they achieve a sale structure with the most suitable tax outcome for them.
If the sale is to an Employee Ownership Trust, then potentially there’s no tax to pay. Otherwise, upon sale to a private party there will be tax payable, although at a rate lower than most of the prevailing rates in the UK tax system.
If the business has been owned by the vendor for at least two-years, then the first £1m of sale profit (above the annual exemption) is taxed at 10%, with any sale profit above then onwards taxed at 20%. Whilst few people enjoy paying tax, that does compare favourably with the highest rate of income tax (45%).
Another important tax consideration – which is often over-looked – is the impact on a vendor’s estate and potential Inheritance Tax (IHT) position, immediately post sale.
Whilst the business is trading, it will qualify for Business Property Relief (BPR) which means that, should a business owner unexpectedly die, there would be no IHT payable on the value of their business assets. However, upon sale they have exchanged that business asset for the proceeds of sale – potentially millions of pounds – which are immediately in the estate for IHT purposes. For example, the sale of a business for £2m could immediately generate a potential IHT liability of £800,000.
There are options to mitigate this liability, such as investments that qualify for BPR rollover relief, or good old-fashioned insurance. However, it’s vital that the vendor understands this implication, particularly if they are in ill health or if their family would be left financially vulnerable in the event of their death. Remember that many business vendors are selling because they are approaching the end of their working life, and so they are usually of a certain age. In many cases, the business owners have been the one within a family that has controlled the finances throughout their working life and they have the most assets in their name. The spouse and wider family might be left in a difficult financial position, as well as the burden of these responsibilities if that figurehead was suddenly not there.
On a more positive note, a business vendor has hopefully generated the sale proceeds they want from the transaction and can look forward to the next stage of their life, or next venture, with a sense of financial security. The vendor will have gone from a position where they operated within a business they understood inside out and was very much within their area of expertise. Post-sale, they are hopefully in a position where they have a large sum of money to now manage. This brings with it great flexibility and opportunity, as well as added responsibility, particularly if the sale is at the end of someone’s working life. As ever, there are also tax considerations to bear in mind, so at this stage I’d suggest taking financial planning advice in order to implement a strategy to help map out the next stages, and visualize how they might look after their well-earned funds.
Advice for Buyers
If you’re at the beginning or middle of your working life, or if you’re new to owning a business, at any age it’s likely that you have a whole host of responsibility within that business, as well as a need to provide for your family and loved ones. That’s not just a commitment to get things done, but a huge financial responsibility, too.
If you’re a business owner – particularly if you’ve just bought a business – it is likely that you are responsible for the livelihood of your family, your employees and their families, and ultimately for any financial debt in the business too. It’s therefore imperative to financially protect yourself and the business, and to get the right structures in place to make sure the business can cope with any unexpected interruptions. Essentially, the priority is business continuity planning, but with a focus on yourself as the business owner and figurehead rather than tangible assets.
The key point to take away is to start planning and seek the appropriate advice as soon as possible – whether that be of a business/tax advisor, an independent financial advisor, or a lawyer. Selling a business can be a deeply emotive and highly complex process, and so making sure you have expert knowledge and expertise at your disposal will assist in ensuring a smooth sale, where you achieve your own personal objectives.
Nick Gwilliam DIP PFS is joined by Peter Drown, Senior Partner of Beavis Morgan LLP, accountants, tax and business advisors.
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