Selling your business can be a difficult experience, not only because of any commercial, financial and legal matters you are faced with, but also because of your emotional ties with something you have no doubt worked really hard for. And what about your ‘purpose’ when the business is eventually sold? And how do you even start the process of selling?
<b>Thinking about valuing your business</b>
The obvious first step is knowing how much you should sell your business for. We often experience clients who have a ‘price in mind’, or have even received an offer before considering the true ‘value’ of their business, and what it is they are actually selling. As they say in the valuation business, so long as you have a willing seller and a willing buyer, the price is right! If only it was quite as simple as that.
The value of your business will depend on many factors, such as:
• <b>What are you actually selling?</b> If you are a limited company, is it the shares, or are you selling the assets (goodwill and other ‘net’ assets’)? Both valuations will produce very different results, as with a share sale you will be selling everything, even the company’s cash.
• <b>The industry you trade in.</b> For instance, there might be Industry Standard valuations, which will give a very good indicator as to the open market value.
• <b>Past and future performance.</b> Any buyer will want to understand how the company has traded in at least the past 3-years, but more importantly they will require insights into expected future performance and expected maintainable or normalised profits.
• <b>Are you staying or going?</b> When the seller stays with the business post-sale, this could have an effect on the value and the overall deal.
• <b>How will the buyer pay for your business?</b> Is there a deferred payment element and/or a clawback for any lost business?
• <b>What are your tax implications?</b> If you are selling shares it’s likely you will pay less tax than if you were to sell the company’s assets. This might need to be reflected in the asking price.
• <b>What are the risk factors?</b> For instance, do you have any recurring fees, fixed contracts, or a confirmed pipeline? Are you on your own or do you employ a team? Is the industry you trade in fairing well? Is it recession proof? What working capital is needed to keep the company going when you’re gone?
• <b>Who is buying your business?</b> If selling to a competitor, it might be the case that the value of your business is worth much more to them than another type of buyer, such as a standalone investor.
There are many other factors that could affect the ultimate value of your business, but as can be seen, there’s much to consider before agreeing a price.
<b>How is my business valued?</b>
When it comes to valuing your business, there are numerous valuation methodologies that could be used. These include:
•<b> A multiplier against pre-tax profits.</b> This is used to derive what is known as the ‘Enterprise Value’ (EV). EV represents the value of a business independent of its financing structure i.e. debt and financing. Transactions to acquire a company’s business may be structured differently, depending on circumstances. The level and characteristics of debt, the existence of contingent liabilities, and tax considerations are some of the issues that will influence whether an acquisition is structured as an asset or share purchase. In concentrating on EV, we exclude consideration specific to the way each transaction is structured and focus on the value of the business.
•<b> Industry standard.</b> Your particular industry may already have set benchmarks and expected methods of valuation, with these often formulated against normalised profits or turnover.
• <b>Dividend yield.</b> This technique looks at the dividends actually paid, or implied, throughout the period of review and will often give rise to a valuation that compares to public company valuations. It also gives a very good indication of the rate of return the buyer can expect to achieve over-and-above ongoing salaries and other perks.
• <b>Net assets. </b>The underlying net assets of the company can sometimes be used to determine the open market value, or might be used to establish whether there are any issues that would cause the company to be under or over-valued. This type of valuation method is relatively straight forward and although in a trading company rarely represents the true valuation, it is useful in underpinning any other valuation models.
The exact science of valuing a business is likely to always be a moveable feast, which is why solicitors need to get involved. A sale of shares for instance, will require a share purchase agreement to be drafted. This is a complex document, but it’s there to protect you and ensure you receive the right price on the day of completion. In other words, the sale of shares doesn’t always allow for an exact value to be agreed, as this will depend on the level and make up of net assets on the day of completion.
<b>Should I use a selling agent?</b>
This is very much driven by your industry and whether or not you have any buyers in mind. Sometimes, the most successful transactions come from within i.e. a management buy-in or buy-out. But if you don’t have that luxury, your will of course need to go to the open market.
Selling agents, particularly industry specific ones, can be very helpful in finding you the right buyer. Highly experienced general agencies can also be a valuable addition to your succession team. There are many agencies out there, and it’s all about finding the right people to work for you.
In some instances, you may wish to use us to confidentially approach your business associates, such as friendly competitors, customers, suppliers etc.
<b>How much tax will I pay?</b>
You’ve guessed it – it depends on what you are selling.
Based on the current tax regime, you will pay less tax if you are selling shares, as depending on how much you are selling for, you will pay much lower rates of capital gain tax. For instance, presently Business Assets Disposal Relief would ensure a 10% tax rate for the first £1 million gains of your business asset disposals.
If however, you are selling assets out of your company, there will be a double-tax charge. This is because the company will need to pay corporation tax on its gains, and you will then need to pay tax (income or capital taxes) when you make a final distribution out of the company of any remaining cash.
<b>Are there any hidden issues?</b>
You’ve done it. You professionally valued your business, found the right buyer, got the right price, received all payments, and now you can walk away into the sunset. For most business owners, re-establishing a purpose in retirement can be difficult to deal with, but that’s something you will no doubt plan for.
<i>You can also plan for some hidden taxes.</i>
When you owned your business, on the presumption that certain conditions were met, it was covered by Business Property Relief (BPR) for inheritance tax (IHT) purposes, meaning it would fall outside of your Estate for IHT. However, now that you’ve sold it and have turned its value into cash or other non-business assets, you have a potential IHT problem. This is because any such assets will now fall into your chargeable Estate, and could suffer a large IHT charge (up to 40% based on current rates). So not only have you paid tax when you’ve sold your business, but your Estate will have to pay even more tax when you’re gone.
<b>It’s no wonder succession planning is often the biggest headache of all for many business owners, but with the right advice and support we can help to ensure a successful outcome and a happy retirement, at whatever age or point you decide to sell. </b>