How to make the most out of selling your business
Selling your business can secure a wonderful future, but it takes meticulous planning to achieve the best possible financial outcome. From preparing your business for sale, to negotiating with private equity companies and reducing your tax bill, we pinpoint key points to consider.
There’s nothing like the voice of experience, so we talked to three experts: Chris Ray of corporate finance consultancy Branta, entrepreneur and angel investor Rob Hamilton, and our own Paul Willans of AJB Wealth. ‘Remember, it’s never to early to formulate your exit plan,’ says Willans.
1. Prepare well in advance
‘We always say that you should be running your business every day in the expectation of selling it tomorrow,’ says Chris Ray, MD of Branta, a Hampshire-based corporate finance firm. ‘You can be doing yourself out of sale proceeds if you’re not ready.’
Indeed, it pays to prepare years ahead. Rob Hamilton, founder of Instant Offices, sold his business to a private equity company in 2012. ‘I think most businesses need a two to three-year lead-up,’ he says. ‘We went out to discover what we needed to do to sell, so we could work towards it.’
2. Invest strategically
‘You need to do your investing a couple of years before. That way, you’re seeing the benefit of investing when you come to sell,’ advises Hamilton. ‘All businesses have fits and starts. You don’t want to sell your business when you’re having a bad period. Two things really matter. Profit and growth. One without the other will get you so far. But if you have both, that’s when you get the big multiples.’
3. Keep perfect records
Make sure you keep thorough records, and not just cash flows and balance sheets. ‘Pretend you were walking in off the street to buy this business,’ says Ray. ‘What would I expect to see? Which risks do I need to understand? What special customs do you have? You almost need an instruction manual for your business.’
4. Consider your personal position
‘Don’t be a miserly employer to yourself,’ says Willans. ‘Ensure that your personal employee benefits package is comprehensive, and adequately provides for ‘what if’ disaster scenarios. In particular, maximise your pension contributions. This is a very effective means of extracting profits prior to sale.’
5. Minimise capital gains tax
If your business is likely to be worth more than £1 million, give thought to gifting shares to your spouse. That way, you both benefit from Business Asset Disposal Relief (formerly ‘Entrepreneurs’ Relief’). ‘This will significantly reduce your exposure to Capital Gains Tax,’ says Willans. ‘However, certain rules and qualifying periods apply. So ensure that you look into this at least two years before you plan to sell the business.’
6. Get the right advisers
Most people use a specialist business broker or corporate finance advisory firm to help sell a business. Look at their professional qualifications and experience. Find out as much as possible about their process, and to what extent they’ll represent your interests. Bear in mind that a broker’s main purpose is to introduce buyers and sellers. A consultant however, may support you through the whole process – including these difficult conversations involved in hammering out a deal.
The size and value of your business will be a major factor in deciding the way forward. Going it alone might make sense for small businesses. Whatever path you choose, ensure you have the right accountant and lawyer on your side.
7. Understand the value of your business
Advisers can help you deepen your understanding of the value of your business and put you in a stronger negotiating position. ‘People usually have a good idea of what their company’s worth, but our analysis will be a lot more detailed,’ says Ray of Branta. ‘This will allow you to substantiate why the value is what you think it is.’
8. Reach the right potential buyers
For some types of businesses, an auction is a way of achieving a higher sale price. ‘The more people you can get into an auction at the beginning, the better chance you have of getting a good price,’ says Hamilton. ‘You only need one person who’s prepared to pay that extra premium.’
9. Admit to skeletons in the closet
Being open about any problems at an early stage will put you in a stronger position in the long run. Have a strategy to address them. If problems emerge at a later stage, there’s a risk that the buyer will walk away or renegotiate on price.
‘You’re in a very weak negotiating position at that point,’ says Ray. ‘The trick is to get the skeletons out the closet early on. Most people will accept there will be problems with any business. Like buying a second-hand car, you wouldn’t expect everything to be perfect. It’s fine as long as the basics are right – the engine runs, the electrics are ok, you’ve got a good service history.’
10. Be prepared to accept deferred payment
In the majority of cases, there will be an element of deferred consideration – the promise of payment in the future. ‘Quite often people will tell us at the beginning that they want all their money on day one,’ says Ray. ‘You can take your all your money on day one but you may have to accept that the gross price achieved will reduce. I would say 80 per cent of the time or more, there’s an element of deferred consideration.’
Often the previous owner will be asked to stay with business for a while, sometimes several years. This allows an orderly handover, and can be beneficial for the seller too. However, there are often cases where the seller is ‘sent home’ early on, so be prepared for this.
11. Scrutinise every detail of the sales contract
Documents are often drafted by the buyer, probably in their favour, so it’s vital that you and your advisers scrutinise every aspect and challenge where appropriate. Even where sellers are completely open and honest, there are frequently issues down the line. Particularly in relation to deferred payment.
‘Once you’ve completed the sale and are no longer in the business, you’re in a pretty weak position to renegotiate,’ points out Ray. ‘That’s where we think we like to come into our own. We will negotiate these documents and agree them before the seller signs anything.’
Warranty clauses are one element which can be overlooked. ‘It’s easy to gloss over the warranties, because you think there’s not going to be a problem,’ agrees Hamilton. ‘You’ve been honest and believe in the business you’re selling. But it’s important to think carefully about how these clauses are written. It might be worth looking into warranty insurance.’
12. Disclosure letters
The disclosure letter comes at the final stage and details anything relevant that’s happened since the agreement was finalised. ‘You have to be very careful about how you write that letter. Very specific,’ advises Hamilton. ‘Spend a lot of time thinking about it, writing it, with your lawyer. There mustn’t be any ambiguity.’
13. Be prepared for battle
However carefully agreements are drafted, there’s the likelihood of a battle over deferred payment. These matters are generally settled out of court, and involve the signing of non-disclosure agreements. And so, they are rarely talked about openly. It’s important to ensure you would be able to defend your position if the need arises.
As far as possible, keep copies of your main files and accounts. ‘If there’s any comeback you’ve got access to the data you need to prove that you’ve done nothing wrong,’ says Hamilton.
This is one area where advisers such as Branta can help clients. ‘We had someone recently who sold their business to a private equity company. They told her they weren’t going to pay her the £400,000 due in deferred payment. We were able to do some forensic work after the sale, and get a substantial proportion back for her,’ says Ray.
14. Recognise the limitations of professional advice
Everyone involved wants the deal to be done, and almost all will have a financial incentive. This is a positive in many ways, but be aware that people are seeing the situation from a different perspective from you. ‘You have to be your own counsel to a certain extent. Think about what you want,’ advises Hamilton.
15. Seize the moment
Once you’ve decided the time is right to sell your business, seize the moment. ‘All you need is for something like Covid to come out of left field and nobody’s buying or selling anything. Your life plans can be put on hold for years,’ says Ray. ‘Banks, accountants and lawyers are telling me that it’s taking longer than normal to sell a business at the moment. But that’s not our experience. There’s plenty of money swishing around that needs a good home.’
At AJB Wealth, our experienced and highly-qualified team is well placed to work with you, and your other professional advisers, to help you achieve financial efficiency and security. To arrange an initial consultation, please book a meeting, or call us on 01483 774 070.
Disclaimer: The views and opinions expressed in this article include third-party comment, which does not necessarily reflect the views and opinions of this company. We have made every effort to ensure that the information in this article is accurate and up-to-date, however, you should not rely on it and should take professional advice before reaching any decision. This company and the third-party commentators are not responsible for any damages that may arise from the use of the information in this article.