For many people, one of the ultimate goals of building a business is to sell it for the maximum price. If this is your aim, early planning will ensure you have the right structures and processes in place to maximise success. You may have a timeline in mind, but market conditions – financial climate, potential buyer profiles and market trends – generally dictate timing, so you need to be prepared for when the moment is right.
There are three key factors in achieving a successful exit: planning, preparation and above all patience.
To ensure your business is attractive to potential purchasers, you need to pay attention to brand and reputation; sales and clients; processes, procedures and infrastructure; and profit and cash flow.
You cannot do this on your own, and a business heavily dependent on one person, product or customer may be difficult to sell, so you should ensure you have a strong management team in place. A good management team can add value and assist with preparing for sale by:
• Developing the basics. A sales director can improve sales; a finance director can improve financial processes and cash flow;
• Providing the new owner with continuity, ensuring existing client contacts are maintained
• Enabling you to exit earlier;
• Providing a potential purchaser: they could acquire the business with funding assistance from, say, a venture capitalist;
• Preventing the business being damaged while you work on the sale.
You should also take steps to retain key individuals. This requires an incentivisation package both pre- and post-sale. Some people will prefer cash bonuses, but a less expensive alternative is a share option plan, which is only available to limited companies. The most common is the Enterprise Management Incentive Scheme (EMI), a highly flexible and tax efficient scheme designed specifically for smaller companies, with recipients selected at the employer’s discretion.
Although historic accounting facts are important, the keys to price are current profitability, future earnings and potential risks arising from change of ownership, such as loss of customers. A business that relies on a small number of clients can be considered high risk and, therefore, less valuable.
Spend time improving profitability, minimising risk and working on future earnings forecasts. Review every facet of your company and address any problems that could devalue the business, from an outstanding VAT enquiry to an employment tribunal. Carry out internal due diligence and resolve any issues.
Look closely at your ownership. Many people assume they will only have to pay a rate of capital gains tax of 10%, as entrepreneur’s relief will apply, but shares in trading companies can be tainted for entrepreneur’s relief purposes by substantial non-trading activities such as owning investment properties or active management of surplus cash, and these may need to be stripped out.
Consider share ownership: for example, a shareholding spouse who does not work in the business will not be entitled to entrepreneur’s relief and a multiple shareholder base (particularly where some are no longer involved in the business) can affect your ability to react to changes and ultimately to negotiate a sale.
The most important factor is patience. It is vital to operate the business as if it was not for sale, and to understand that many deals fall through. Generally, the more prepared your business is for sale, the faster it will sell and, if it doesn’t, the less impact the process will have on day-to-day operations.
Many owners put in a lifetime of hard work building their business only to throw away some of the rewards by failing to plan their exit strategy. These tips should help you achieve the optimum value for your hard work.
Phil Mitchell is director of Harbour Key