Preparing your business for sale – a short guide
By Zee Hussain an associate director, corporate law, at Progeny.
Business founders come in all shapes and sizes and with an infinite set of motivations for launching an enterprise. However, an aspiration that many will share is the ultimate sale of their business -often the most important decision many business owners will make.
For some, this may have been the sole reason they set up a business in the first place, for others, it is an ambition that develops over time, in step with the growth of the business and their evolving entrepreneurial ambitions. Either way, working towards an exit after many years of running your business can be a stressful process, one which can impact both family and business life.
We support a great many businesses through this process, working with the owners to ensure they are ‘sale ready’. There are a number of steps that businesses can take to best position themselves for a successful sale.
To be able to maximise the value of your business for a sale, the sooner you start preparing for it, the better. Even if it is years into the future, the earlier you start making concerted steps towards it, and calibrating your business towards that goal, the better the result is likely to be. Taking professional advice at this point will be more than worth it in the long term. Planning for an exit and implementing good business practices and disciplines in advance of a sale, will make it more attractive to potential buyers and help secure the best valuation.
Linked to this is the impact of first impressions. Don’t underestimate how quickly a buyer or investor will form an opinion about your business on first coming into contact with it and its representatives. Potential buyers might be looking at a number of possible targets and a bad first impression is an easy way to tick a business off the list. Enter into the process in a coordinated manner and on your own terms, rather than dipping your toe or falling into it. This instantly shows you mean business.
Cultivate kerb appeal
Your key objective in preparing for a sale or investment is to present the business as attractively as possible to potential buyers or investors, demonstrating what we call ‘kerb appeal’. The buyer needs to see that the prospects for the future are healthy and the business is on a growth curve.
This entails making sure your financial records and information is all in order, along with relevant management accounts and client and customer data. All should be accurate and aligned with the business story you are telling. Then there’s the strategy and projections for the years ahead, not just up to any potential sale event, but beyond this. It needs to show a clear path and vision for the future.
And finally, not forgetting the legal, compliance and regulatory detail that needs to be present, correct and robust, such as: incorporation documents; share registers; property documentation; intellectual property; data protection; employment contracts; and supplier and customer contracts.
Many potential sellers are unaware that due diligence can be extensive and onerous. It can uncover unresolved business issues, skeletons in the closet, incomplete documentation or any number of problems that could slow down or even sabotage a sale or investment. Tackling this head on and resolving any issues to your – and any potential buyer’s – satisfaction in advance can make your business significantly more appealing, with a potentially higher value and a smoother sale in future.
Set the right structure
A key focus for business buyers is how the business is led, with them often taking a less than favourable view of a business that is highly dependent on one key person. A business owner who is running the entire operation can be seen as a disadvantage, or something that can adversely affect the business’ value because it could put the business at risk. A buyer will want to ensure that the business is capable of operating, and growing, in the seller’s absence. There needs to be a succession plan.
A corporate structure that shares the responsibilities of management across a broader team presents a far more attractive option by demonstrating you have a credible management team, who can continue to drive success when or if the owner steps down. Seeking to put this structure in place ahead of a sale is a process that many successful business founders seek to implement. Bringing the management team into the shareholdings can help businesses incentivise their senior personnel, locking them into the company to provide continuity beyond the sale and the scope to grow and develop beyond this.
Share option schemes such as an EMI (Enterprise Management Incentive) Scheme can be designed as a great way of incentivising management for the long term as well as allowing them to participate in the value realised from the sale process in a tax-efficient way.
Don’t underestimate the emotion
Good advisers will understand that a business owner or founder’s relationship with their business is far more than just commercial. Often a successful business is the result of the blood, sweat and tears of all those who have worked on it over decades, into which they have poured the best part of their intellectual and emotional (and financial) resources. The sale process can be complex and stressful and can take a huge toll on your emotions. Working with advisers who understand this and can share the burden can save you a great deal of precious energy and time.
Blend of advice
Positioning your business for investment or a sale is all about taking a 360 degree view of it and understanding that it does not exist in isolation. One of the best ways to achieve this is with support from all the relevant advisers: legal, tax, financial, accountancy. Pre-sale tax and wealth planning can ensure the sale proceeds are received as tax efficiently as possible and can mitigate inheritance tax with the use of family trusts and protect the proceeds for the future.
A team of advisers can help make sure your own personal ambitions are fully accounted for and hopefully realised by the ultimate sale or investment and that it is tax-efficient, also offering investment advice where appropriate. There are a number of tax reliefs available to sellers, including Business Asset Disposal Relief and roll-over relief which can be explored and maximised. Sellers may want to invest the proceeds of the sale or pass on to family members, which if fed into the mix early, can be planned for from the initial stages.
Preparing to sell your business is all about preparation and seeing it from the buyer’s perspective. Taking professional advice early on in the process from experienced people will generate the best results.