Preparing a business for sale: enhancing the quality of your earnings

When you sell your owner-managed business, you want to guarantee the best possible profit from that sale. But guaranteeing the quality of your earnings from this deal means taking a forward-looking approach to your sale strategy from the very beginning.

In this four-part series, we’re looking at each of the core elements needed to prepare your owner-managed business for a sale.

In part two, Paul Simmons, highlights the important pre-sale areas to focus on to ensure you get the best return on your investment.  

Understanding the value of your company

Selling your business is a complex and protracted process. And, as we covered in Part 1 of this series, having a defined goal, strategy and plan are all essential elements of a successful sale.

But in order to enhance the quality of your earnings from a sale, you also need a very clear focus on creating and nurturing the potential value that’s locked up in the business.

Ultimately, it's about what you, as the owner, will get out of the sale:

1. Firstly, it’s important to have a realistic understanding of the potential price you can achieve for the company, and the profit you can make.
2. Secondly, it’s about knowing what elements will affect the value of your company when you’re looking to sell – and how attractive it will look to prospective buyers.

What buyers will look for

A company is only worth what a buyer is willing to pay, based on your current situation and the position of the business in your specific market, industry or sector niche.

But what are the key elements that affect this perceived value?

• Stability of your financial results – to be saleable, the company needs stability in its financial trends and results. That means having the right growth profile, profit levels and gross profit, leading to a healthy bottom line on the balance sheet.
• The right amount of bottom line profit – in general, when selling a private company, the business should be making a minimum of £750,000 a year, otherwise it's just going to be too small for someone to bother buying it up.
• The best possible margins – make sure you’re selling whatever you produce or sell at good margins. It's much better to have one client paying you £20,000 a year, than 20 paying you a thousand per year; that's just hard work.
• Working with the right customers – to secure the future of the business, you need the right customer base and the ideal mix of customers. So that means negotiating good contracts, having beneficial agreements and knowing which customers are actually bringing in the healthy profits (and which are just draining your resources).
• Understanding your supplier base – with the ongoing economic uncertainty and the impact of Brexit, there’s a clear need to have tried and trusted suppliers. That supplier base should all be tied up, with good paperwork to evidence that your relationships are consistent, agreed in writing and under your control.
• Knowing your unique selling point (USP) – it’s vital to know what you do, as a business, that keeps customers coming back for more. That USP is what attracts prospects and builds relationships. So it’s important to evidence that you've got a USP, when compared to the competitor down the road who sells a similar kind of widget.

Building solid foundations for the future

For a potential buyer to consider a sale, they need to know that your company is a sound investment. And to ensure you have a good spread of customers and suppliers, with good margins and an attractive bottom-line profit, it helps to work with experienced advisers.

We can help you understand:

• Your profit margins – so you comprehend the margins the company is making – by customer, by product, by activity, or however your particular business breaks down – and can work towards improving these margins
• The narratives in your financials – by exporting deeper and more detailed management information from your accounting systems, we help you make the right decisions about which parts of the business to focus on, rather than just trundling along making a satisfactory income.
• The right focus on growth – so you have a clear growth target for the next year. If you’ve got that story sounding convincing to a buyer, they are going to be more inclined to pay you a high number if they can see that growth is going to continue.

In short, invest in future growth, so you attain the desired quality of earnings.  

Planning your tax liabilities

Tax planning is key if you’re going to maximise the quality of your earnings, attain the best possible return on investment and meet all your compliance requirements.

Central to this planning process is looking at areas like your group structure, how the shares are being held and whether any housekeeping is needed prior to the sale. For example, does the group own any property? When the business is sold, do we want to sell the property as well, or should that be extracted from the group?

Entrepreneurs’ relief (ER) is another consideration, with it being important that you and any interested parties have owned company shares for two years or more in order to qualify for lower tax costs on the sale of your shares.

So, tax planning will be a fundamental part of early planning. It's quite common to have historic shareholders who are no longer involved in the business. So do you need to tidy up these loose ends, this is a good time to buy out these shareholders and ensure you’re planning effectively.  

Working to a realistic timescale

Allowing enough time to plan your sale is critical. Of the companies I've sold in my 20-year career, most of them have had a five-year plan – from starting to plan through to the sale.

That could probably be crunched down to between two to three years, now – as with everything in modern life, the time scales have become reduced. But if you're going to start trying to alter profits over a set period of time, you need to allow enough time to have an impact.

If you want to demonstrate growth and improved financial results, the bare minimum you need is a two-year plan. It takes on average at least six months to sell a company anyway. But three years, in terms of putting a plan in place to have an effect and improve the sale price, is probably a better time scale to bring about the most successful changes.  

Helping you make the right changes

To get the best sale price, it’s highly likely that you will need to make some key changes to the business. And this is where working with an experienced advisor adds real value.

A good advisor brings a sense of objectivity and drive to the planning of your sale. We can push you to take a brave step, and give you the confidence needed to take that leap of faith – always with the long-term health of the business and your own quality of earnings in mind.

It's about challenging the status quo and saying, 'Okay, well, that's the road you've been traveling along. Where else can we go?'. By being nimble and agile in this way, you keep the business on track and keep one eye on your future sale.  

Part 3: housekeeping – where and when to clean up

The companies that keep fine-tuning their business; they're the ones who succeed. They move with the times, keep adding value and attract better sales prices. In part 3 of this series we’ll look at where to start this vital review and housekeeping process.  

Talk to one of our business advisors about preparing your business for a sale.