By Kevin O’Brien, senior business partner, DTE Business Advisers
Selling your business is part art, part science, and like selling anything you need to present the opportunity in the best light to potential purchasers and also be aware that it is a complex issue that requires maximising both your sale price and tax position. You will probably only do it once and not to properly ‘groom’ your business could be costly for both proceeds and taxation.
1. Maximise your own taxation position. If you are selling a limited company there are two main ways of doing this.
• Sell your shares. This will mean you will potentially qualify for entrepreneur’s relief and pay Capital Gains Tax at only 10% on the gain, after annual exemption allowance of currently £11,000 per person. You must ensure that all shareholders, including spouses, have the basic pre-requisites, which is to be an officer or employee, and to have held more than 5% of the shares for at least twelve months before sale.
• Sell the assets out of the company. If there is a gain on the assets, including goodwill, the company will pay tax on these gains at appropriate tax corporation tax rates, say 20%, and then you will have to liquidate the company to distribute to shareholders who will then pay another 10% on the gain.
2. A potential buyer will carry out a due diligence process which will cover legal, commercial, tax and accounting aspects of your business so make sure your house is in order. If there are any weaknesses or “chinks in the armour” the purchaser will use these to reduce the price and go for an asset purchase rather than a share purchase.
Such key areas, although by any means not exhaustive are;
• Employees contract of employments, and the terms such as holidays, sickness, benefits, notice periods and restrictive covenants to protect the business should they leave and try to take customers with them.
• Assets. Make sure proper title to assets
• Tax compliance i.e. VAT, PAYE, corporation tax. Make sure Crown payments are up to date and that investigating accountants cannot find potential liabilities lurking to hinder negotiations for the price and method of sale.
• Review your Terms and Conditions of Sale and customer and supplier contracts to make sure they are robust and up to date.
3. Make sure dependence on you is reduced in the period up to sale. A buyer will have concerns that once you have gone, the business will suffer, so you must be able to demonstrate that you have a good management team who can run the business without you.
4. Make sure you have an up to date shareholders agreement that has the appropriate provisions to facilitate the sale where you may have dissenting minority shareholders i.e. tag-along and drag-along provisions.
5. Get yourself a good experienced legal, accountancy and tax team to lead you through the process. The right team at the right time will help to structure the deal as best for you, maximise your value and tax efficiency and protect you from onerous clauses in the Sale and Purchase agreement and subsidiary agreements. Don’t worry about cost of his/her advice, as ultimately the right team will ‘pay for themselves’.
6. Prepare, or have prepared for you, a robust memorandum for sale that will ensure your business is properly marketed. This can then be distrusted to interested parties who have signed a pre prepared confidentiality agreement to protect commercially sensitive information. This is usually prepared by a corporate finance practice that may also be able to assist with targeting prospects.
7. Prepare your own valuation of your business. This is normally prepared by an appropriate experienced and qualified accountant using recognised methodology which will stand up to the scrutiny of the investigating purchaser’s advisers.
8. Prepare a business plan that identifies strengths, weaknesses, opportunities and threats, (SWOT analysis). This will demonstrate that you have a strategy, know your business and have a vision for the future.
9. Like selling your house, prepare your business and premises for inspection. Make sure is looks clean and efficient, stock and office tidy, annual accounts and management accounts up to date. This will demonstrate professionalism and control.
10. Don’t leave it too late. Plan your exit strategy that gives enough time to adequately prepare you to maximise the return on your time and effort in building up your business, which could take years.