Selling Your Business? Here’s All You Need to Know
Rich Grover joined the Hazlewoods Corporate Finance team nearly five years ago. He qualified as a Chartered Accountant at Deloitte in Bristol and spent three years auditing privately owned and listed businesses before moving into a more commercial advisory role. He now helps small and medium-sized business owners sell their companies, as well as advising on acquisition targets, due diligence and refinancing.
With the positive economic forecast and a tax favourable environment, is now a good time to consider selling a business?
Hazlewoods Corporate Finance team has seen a surge in buying and selling activity across a range of sectors. Mid-market private equity houses are seeking quality assets to strengthen their portfolios – and have cash which they must deploy. Likewise, corporate acquirers are seeking to enhance their market share and consolidate their position post-pandemic and are seeking acquisitions that enhance their market position.
Meanwhile, many business owners have been assessing their personal and business aspirations over the past year or so, with many deciding that new pastures lie ahead. Selling to the existing management team via a management buyout (MBO) or employee ownership trust (EOT), or to a trade buyer or private equity, enables them to secure their business and the future of their employees while creating flexibility for them to explore other interests.
With the economic forecast improving and well-structured business disposals attracting only 10% tax in some cases (or even 0% tax on a sale to an EOT), now is a great time to sell, particularly since this could all change in the Chancellor’s next Budget; there is a considerable risk that the tax environment may become less appealing in the not too distant future, so it might be best to strike while the iron is hot.
How can the Hazlewoods Corporate Finance team help with exit planning?
Hazlewoods has one of the most active Corporate Finance teams in the UK (we were ranked 6th overall in Experian’s most recent M&A report). Last year, despite the impact of COVID-19, we completed 133 transactions valued at more than £763 million. In the previous 12 months, the figure was 205 deals worth more than £1 billion.
We guide business owners through the exit process every day. We offer a partner-led service from inception and initial scoping right through to completion day and beyond, offering expert advice every step of the way.
We have extensive experience in strategic planning to maximise value on exit and ensure the sales process runs seamlessly.
Here is a brief summary of our proven approach:
- Preparation of an Information Memorandum (a sales brochure that will highlight the strengths of your business to a potential buyer)
- Creation of a Blind profile (a one-page teaser document that will be sent to potential buyers)
- Assistance with the preparation of an integrated forecast model
- Research and identification of potential acquirers
- Advice on the financial and legal structure of the proposed transaction (including any steps required to minimise the tax liability on disposal)
- Guidance on tactics and negotiation of the terms of the sale
- Review of the legal documentation, including the Sale and Purchase Agreement
- Comprehensive deal management – co-ordination of the process through to completion
What would you say are the most important things to consider when planning an exit?
Without a doubt, taking steps to maximise the value of your business is imperative – anyone who is selling their company wants to get the best possible price for what has often been their life’s work.
The following steps will enable you to create a business that is investment ready:
Get your books in order
Accurate accounting information and financial statements are not only important for the effective management of your business, if you want to sell, they provide the best measure of current and future performance.
Create a business plan
Having a strategic business plan will provide potential buyers with the comfort that you know where your business is going and how it will get there. It will increase your credibility in the eyes of investors.
Update systems and controls
Put in place policies and procedures to ensure that your business operates efficiently and complies with laws and regulations – this will reassure a buyer that the company can function effectively post-sale.
Strengthen customer contracts
Your order book will demonstrate your company’s viability. Make sure that client contracts are up-to-date and enforceable as this will show that (at least for the length of the contract) customers will remain with the business when it is sold. Where possible, strengthen existing client contracts and confirm new recurring revenue streams.
Reliance on a handful of customers can be problematic. If important customers switched suppliers, it would pose a risk to revenue and cash flow. Aim to reduce customer concentration and diversify your customer base so that you are not reliant on a few specific customers. Additionally, ensure that you are not dependent on a single supplier – if they cannot provide materials, you need to be able to get them from somewhere else.
Consider ways that you can cut costs to boost profitability, focusing on the bottom line, not the top. If your company is valued on the basis of a multiple of earnings, increased profit will lead to a higher valuation.
Build a strong and motivated management team
Your business is only as good as the people who run it. Make your staff a key asset (a buyer is likely to want to retain them post-sale), make yourself dispensable (rather than indispensable!) and show that you are not vital to the success of the business.
Protect your intellectual property
Patents, copyrights, trademarks and brand names can enable a company to sell its products and services for more money and deter competitors from entering the market. A potential buyer may be prepared to pay a premium for a company with protected IP.
It can take up to five years to become investment ready, but by starting this process as early as you can, the end result will be a profitable, cash-generating business with a robust management team, a positive brand image and strong customer and supplier relationships. This will make your Company an attractive proposition for potential buyers.
What trends do you anticipate for the M&A space for the remaining part of the year?
We forecast a continuing strong demand across numerous sectors, particularly for tech-enabled businesses and those with a strong brand and intellectual property. We are also anticipating an increasing number of MBOs as owner-managers want to retire and leave their business in safe hands.
We have also seen an increasing number of clients wanting to exit via an EOT. In a nutshell, the shares in the business are sold to a special type of trust which is owned by all of the employees – the idea being based around the John Lewis Partnership model – the staff are able to share in the company’s profits with a tax-free bonus of up to £3,600 each annually. Employees do not need to put any money into the business, and it is attractive to shareholders who want to exit because they can sell their shares to the EOT – and take out the money owed to them – tax-free. In comparison, a sale to a third party would incur capital gains tax of at least 10%.
Overall, 2021 is looking bright with a raft of transactions in the pipeline for the Hazlewoods Corporate Finance team.
If you would like more information or a discussion on selling your business, please get in touch with Rich Grover at email@example.com or 01242 680000.