As an owner-manager, selling your business is a big decision. Whether you’re looking to extract your initial investment, open a new business or begin retirement, it’s vital that you start the process of planning your company sale as soon as possible.
So, what are the key areas to consider when looking to sell up?
Daniel Rose, Partner at Haines Watts Hornchurch, explains 8 things to do before you sell a business:
1. Start planning your sale early
If you’re looking to sell up, you should begin planning this at least two years before you actually want to sell – and, in most cases, it’s sensible to allow between three to five years.
A sales isn’t a fast process. And there are a huge number of things to do, whether it’s updating the share structure, moving property out of the business, or enhancing your quality of earnings.
As an example, you need to hold company shares for at least two years to claim entrepreneurs relief. So, if you were planning on transferring shares to a partner then you really don’t want to do that at the wrong time. That could cost you when you do eventually sell.
2. Know what you’re planning to sell
Depending on circumstances, you won’t always want to sell the business lock, stock and barrel. So, it’s important to define exactly what you’re looking to include in the sale.
Your own future plans, as the owner and seller, will come into this. What you sell may differ depending on whether you want to sell up, reinvest or retire completely.
You might be a trading company with a property portfolio and investments on the books, trademarks and intellectual property (IP) that you own and a million pounds in the bank. The key is knowing which of these assets you actually want to sell:
- Do you want to take the property out of the company and keep it yourself?
- Are there any investments in there that you’d rather take out?
- Are you going to take the millions pounds out as a dividend or add it to the sale price?
- Do you want to retain your IP, or include it in the sale?
Knowing what you want to sell is really the first stage in valuing the business and finding the most tax efficient way to extract your earnings.
3. Get an accurate valuation of the business
Before putting the company on the market, you obviously need to come up with a value for the business – and there are a million ways to define that worth in the eyes of the buyer.
A business is only worth whatever someone’s willing to pay for it – so, to a degree, your end price can be highly subjective. But getting a professional valuation is sensible, so you have a measured and objective price to put on the sale.
There will be two main options when it comes to selling:
1. Try and sell the company yourself – this will be the cheaper option, but you’re unlikely to have the ability to accurately value the sale in an objective and dispassionate manner.
2. Find a broker to sell the company for you – brokers will take a commission from any sale price, so you will incur a cost. But a broker will give you a realistic valuation, and may get you an extra premium on top of what you were expecting, if the market is good.
4. Calculate your value multiple
The price isn’t just about what the buyer wants to pay. It’s also driven by what you – as the seller – need in order to finance your next project or fund your retirement plans.
One option is to produce a multiple based on the value of your personal expenditure and the number of years you plan to need this income. So, if your annual expenditure is £100,000, and you plan to live off the profits for 20 years, your sale price must be at least £2M to deliver this.
There’s also the multiples theory of profit EBITDA, where multiplying your EBITDA figure by a certain amount gives you your sale value. That amount will vary across different industries and sectors – some sectors value the multiple on turnover as well.
There’s no easy answer to what the business is going to be worth. But whatever the final price, you need to decide if what’s left after tax is enough to live on, and to continue investing.
5. Run forecasts and update your plan accordingly
Selling at the right time, in the right market, helps to deliver the best return. So it’s important to look at forecasts, factor in economic conditions and reevaluate your plan.
It’s impossible to fully predict where the market will be three years’ down the line from when you wrote your original sale plan. If your plan in 2016 had been to sell the business in March 2019, that would have seemed like a sensible strategy. You’d have had no way to predict the chaos of Brexit uncertainty and the negative impact on prices.
To minimise the impact on your sale price:
- Keep on top of economic conditions – stay in touch with the financial, political and market situation, and review the potential impact on your sale plan.
- Run forecasts and scenario plans – use your financial data to run projections, scenario plan and assess how the value of the business could be affected.
- Amend your sale plan – review, update and refine your plan, so the company is doing the utmost to grow and retain value, and to create a good sale price.
6. Build the best possible management team
As an owner manager and founder, your business is worth far less without you at the helm. So it’s vital that your management team are trained, experienced and ready to step into the breach.
Over the course of sale pre-planning, it’s important to gradually step back and remove yourself from the day-to-day operations. Your job is to work ON the business, not IN it, so it’s a good idea to promote senior management, give them more responsibility and hand over the reins.
When your potential buyer looks at the business, what they’ll see is a company that’s more than capable of running effectively without you – and that’s a valuable proposition for any buyer that’s looking to step straight into the business with minimal hassle.
7. Prepare for due diligence
Before a sale is completed, your buyer will want to complete a ‘due diligence’ investigation of your company, to ensure everything in the business is looking tidy, organised and ship-shape.
Carrying out the relevant housekeeping is vital to making the due diligence run smoothly, by limiting the queries, questions and costly delays that can begin to eat into your profit margin.
When due diligence begins, your buyer will want to check everything down to the penny. So, if your books are incomplete, there are unexplained skeletons in the cupboard, or your processes are not properly defined, that’s going to cause problems later down the line.
The more queries your buyer raises, the greater the chance of the sale not going through. So there may be value in having an audit so you have an opinion on your key figures, or engaging a consultant to look at and refine your procedures.
Ultimately, the more organized and streamlined the business is, the more likely it is that your buyer will sign on the dotted line.
8. Work closely with your accountant
Over the whole course of the pre-sale process, there’s real value to working closely with your accountant and advisors – to ensure the sale runs like clockwork.
We specialise in working with owner managers, so we know the challenges you face when preparing for a sale and can offer you the best possible advice.
We can provide you with customised management accounts over the three years of the sale preparation, carry out a pre-due diligence audit and use our Corporate Finance team to locate the best possible buyer and achieve the sale price you need.
Helping you at every stage of the business journey
Whether you’re just setting out as a business owner, are looking to expand your existing enterprise, or want to sell up and move on, we can provide the advice you need.
- Set the right foundations when starting out
- Grow the business and scale up
- Maximise your quality of earnings when selling up
Get in touch with us today for advice and help with preparing to sell your company.
Haines Watts are Essex accountants, tax and business advisors working with Essex entrepreneurs.
Want to know more? Call us on 01708 475220 or email email@example.com