Most business owners would like to think that one day they will realise their hard work in the form of a large capital payment. However, the sales process is full of hurdles and at times it will be painful despite the dangling carrot of selling your business.
What is your exit strategy?
Preparing the business for sale includes an exit strategy. Are you prepared to continue working in the business once you have sold your shares? Normally those that do, are doing so in order to secure further consideration through an earn-out agreement.
If alternatively, you wish to cleanly exit the business it will need to be equipped with a management team that doesn’t include you. A management team also introduces the potential of a management buyout or a vendor-initiated management buyout (VIMBO), which could be with venture capital funding.
Seasoned entrepreneurs will generally know their exit strategy at the time they are formulating their business idea. It is always useful to know potential exit strategies even if the desired exit is not for a few years.
Should you appoint a broker?
Using a broker can help although you will have to choose the most appropriate broker. You will need to consider what makes a broker appropriate. It would be useful to ascertain:
- their industry knowledge
- track record
- the process they will adopt
- how they will assist with due diligence
- what they value the business at
- the types of deal they envisage
Broker fees may seem expensive, but the right broker will help secure the right deal. It is not always the broker who indicates the highest value of your business that has the correct skill set in practice.
What is the value of your business?
Have you valued your business? The value of a business to the owner may be substantially different to that on the open market. It is essential to manage expectations of value and to know a value you want to achieve for sale. There are several simple things a business can do to improve its value; having an independent valuation a few years in advance of a potential sale allows time to increase the business value.
Could you make the business more appealing?
The sales process will include significant due diligence over financial performance, security and longevity of income streams, litigation risks and tax risks amongst others. Uncertainty in risk areas will reduce the value of your business and affect its attractiveness to purchasers. Testing your businesses risks will allow you to prepare the business for sale, maintain value and respond quickly through the due diligence process.
Most entrepreneurs will dislike lots of paperwork. However, if you are building a business for a significant sale, paperwork is necessary. You should hold regular board minutes and record the board’s decision in a suitably prepared minute.
Company house filings and accounts should be prepared and filed ahead of time demonstrating good internal process. Also, shareholder register, stock transfers, share certificates and director’s appointments should all be prepared, filed and maintained correctly. It is also important to ensure employment contracts and other important legal agreements are maintained.
Many internal processes should be documented allowing the business to function with new resources.
Common tax problems
One of the biggest due diligence items will be tax. The following are common tax problems found during the due diligence process:
- Employment status: companies often seek to engage self employed persons rather than employ people and this may give rise to tax risks where the employment status is questionable
- Termination payments: tax free payments given when they are arguably taxable
- Profit extraction: the shareholders have implemented methods to extract funds tax efficiently, which may constitute tax avoidance
- VAT compliance: treatment of recovering input tax is incorrect
- Expenses and benefits: no policies in place and weak procedures to enforce policies
- CT compliance: allowable deductions against profits have been overstated
- Overclaims: capital allowances or research and development costs are over claim or the basis of the claim is flawed
- Transfer pricing: no policy in place
- Poor tax compliance: returns are filed late, and penalties incurred
- Lifestyle: the company has been run as a lifestyle business meeting personal expenditure of the shareholder/director