The guest blogger for this post is none other than Ken Graham, who is a Chartered Accountant and Managing Director of Kenneth Easby Limited. The information mentioned in this blog does not necessarily reflect the views and opinions of Gale and Phillipson.
In many circumstances the value inherent within a business may mean that it is the most significant asset which an individual possesses.
It is therefore absolutely crucial that sufficient time and effort is spent in organising the individuals’ exit from that business in order to maximise value.
An individual should work closely with his advisers to determine how and when to market the business and to whom. Very broadly, purchases can be divided into three broad categories:
i) Existing/future management
ii) Trade connections (be they suppliers, customers, or competitors)
The individual should look to put in place a quality and trusted management team below him as this can do a number of things. It can allow him to spend time away from the business knowing it is in safe hands. It also has the impact of potentially adding significant value to the business. Any prospective purchaser will look to establish how reliant a business is on its owner and in general the more independent it is of him then the higher the business is likely to be valued. This is a major factor to take into account when valuing a business.
It also offers the prospect of a sale of the business to the management in due course.
Whenever we are asked to advise on the options concerning an exit then a review of the management team is a key element of that process.
A sale to the management tends to have some features distinct from other options. Firstly, the management should be very knowledgeable about the business so detailed briefings on the business are not necessary.
However, a typical feature is that the management may well not have the financial resources to pay for the business upfront. Here a balance needs to be struck between getting the management to make a serious financial commitment so as not to walk away if initially the business does not prosper in their hands but not to burden them with too much debt. In many situations the vendor may need to leave a sizeable proportion of the consideration for the business outstanding. A delicate balance needs to be struck here.
Selling to trade connections introduces its own considerations. In this situation the vendor will need to take great care over the disclosure of confidential information which a trade related third party could use to its advantage if for whatever reason the sale does not proceed.
However, it is often possible to maximise the value on a sale to a competitor as in many situations a trade competitor can obtain savings as a result of merging businesses/obtaining economies of scale which are not available to other purchasers and hence can allow an individual to negotiate a higher price.
A trade related purchaser typically has significant existing knowledge which can also ease the process in a sale.
The extent to which it is possible to sell to the third category of potential buyers “others” depends very much on the nature of the business and the extent to which it is possible for someone to step in and own the business without any significant existing trade related knowledge.
A final but very important consideration is taxation. Capital gains tax will apply on the sale of a business and care is needed to structure the sale to minimise capital gains tax and hence maximise the final net return to the individual. Substantial sums of tax can be saved by reviewing the tax structure of a business in the run up to a sale.
An individual typically only goes through the sales process once in his business life and adequate time and resources should be dedicated to the process to ensure the best possible outcome.
If you are passing on your business to a family member it may be useful if you read our factsheet on succession planning.
See Kenneth Easby Limited’s website here:
The content of this blog is for general information only and should not be considered advice. Information is based on our current understanding of tax legislation. Tax treatment depends on individual circumstances and may be subject to change in the future. Professional advice should always be sought prior to making any decisions or taking any action. All details were correct at the time of writing.
Reference – BL037 – Oct – 18