Edinburgh business owners: how to sell your firm and make a profit
For many private business owners, selling their business isn’t something that regularly plays on their mind. When it’s full steam ahead looking after the day-to-day demands of running the company it’s easy to think that it’s a topic for another day, one that will take care of itself when the time comes. However, just as you should regularly review your other financial assets, a business owner should continually revisit his/her priorities, and keep in mind that selling could be an option sooner or later than you had previously envisaged. You should regularly consider whether your commercial objectives can best be met by continued ownership of your business or sale of part or all of your business.
There are many reasons why a business may be sold. Retirement is the most obvious one, fuelled by either a desire to stop working or to do something else, with or without the cash released from selling the business. The absence of family members to take over can be a fundamental issue and one that may not be easy to resolve. For some, it can feel that they have reached the limit of what is possible and that the next stage of development is better to happen under ownership with deeper pockets or scalable infrastructure. Last but not least, some simply receive an offer that is too good to refuse. Selling now wasn’t part of the plan but would they get the same or better price later and is it worth the risk to wait?
Whatever the motivation, the decision to sell your business, when and to whom, is one of the most important financial decisions you will ever make. It is perhaps surprising then that many private business owners don’t plan their exit and are not aware of the various ways in which they can dispose of their business. Depending on the specific circumstances, there are likely to be a number of exit routes available to the owner and exit strategy planning is vital to ensure that the best outcome is achieved, both in terms of sale price and personal aspirations.
The primary exit routes available to private business owners looking to sell are:
- A third party sale (‘trade sale’)
- A management buy-in or buy-out (‘MBI’ or ‘MBO’), or a combination of the two – a buy-in management buy-out (‘BIMBO’)
- Employee ownership
- Family succession
- A public flotation
The most popular exit route in recent years has been a trade sale to a company that sees the strategic value in bringing your business into its operations. For example, to a direct competitor, a supplier who sees a clear route to market for their own product, or a company with a comparable customer base that spies an opportunity to expand their product line. Ambitious management teams backed by supportive funders (banks and/or private equity) can provide strong competition to trade buyers, and this may feel like a safer bet for owners. The family succession route is now becoming less prevalent with many heirs either not interested in or not capable of taking over. Employee ownership is an increasingly common exit route, especially where the business is critical to the local economy, or where the owner is particularly keen to ensure that the culture and ethos of the business is protected. Whilst a public flotation can provide access to additional capital it does not necessarily provide an immediate exit for the owners and the increased public scrutiny and regulatory requirements can be unsettling.
The choice of exit strategy adopted and the timeframe to complete can make the difference between disposing of the business at a fair price and not selling at all. An important role for the advisor is to fully understand the key drivers for the owners, asking the important, sometimes difficult, questions in order to attain the most suitable exit strategy. For some, the emotive aspects such as employee security and cultural fit may be just as important as financial gain.
Our experience has shown that owners who approach the sales process in a controlled and structured way are far more likely to achieve a more satisfactory result on completion of the sale.
The earlier this exercise is undertaken the more exit options that will be available and the more likely that the optimal outcome will be achieved in terms of sale price and personal aspirations. Consideration should be given to all exit routes, as a variety of unique factors will influence the final strategy that should be adopted.
By Lyn Calder, head of deals, Central Belt at Anderson Anderson & Brown
Avoid taxing wrong moves by getting a plan in place
For individual sellers, the availability of Entrepreneur’s Relief (ER) is often one of the most important considerations for a seller on the disposal of the business, which allows the first £10m of gains to be taxed at a 10 per cent capital gains tax (CGT) rate subject to various conditions.
There are some traps that the unwary can fall into which would result in their shareholding not meeting the sometimes complex conditions attached to ER.
For corporate sellers, the substantial shareholding exemption (SSE) provides an exemption from corporation tax on capital gains realised on the disposal of shares in trading companies, subject to meeting a number of strict conditions.
Sale price negotiations are often, understandably, the most challenging and time consuming element of the disposal process. The seller, believing strongly in the company’s future growth and profitability capabilities, often unrealistically expect that expectation to be reflected in the sale price. Earn-outs are frequently negotiated, with additional consideration received by the seller where the company achieves certain future performance conditions.
Earn-outs give rise to additional CGT implications for the seller, therefore it is fundamental that professional advice is sought regarding earn-out structuring to ensure future additional gains are not triggered before the earn-out period concludes.
Although easy to overlook, considering the acquirer’s perspective during tax structuring activities can further maximise proceeds upon an eventual sale. For example, a highly skilled and experienced management team who will ensure continuity of operations during the transition stage will be critical to the acquirer – implementing tax efficient share schemes can therefore assist towards incentivising and retaining such key employees. Timing implications towards implementation of such schemes is crucial however, therefore consideration should not be delayed.
What is certain is that it is never too early to consider tax planning structures where a future company disposal is envisioned.
Advance planning can not only increase a company’s valuation, but from the seller’s perspective, minimise tax leakage against disposal proceeds. Engaging with a professional advisor to conduct pre-sale health diligence checks can help identify and advise upon tax efficient structuring solutions, assisting achievement of the ultimate goal to maximise post-tax proceeds.
By Kevin Meaney, Tax Partner at Anderson Anderson & Brown
What to consider if you are thinking of selling your business
Despite the ongoing uncertainties around Brexit, now is a good time to sell your business. Trade buyers have not been put off by the economic rollercoaster and private equity houses have plenty of cash to spend. If you are considering selling your business, here are some points to consider:
Get your house in order and be honest if it isn’t
Strong corporate governance, robust financial and tax management and a tight legal framework give buyers peace of mind. Where there are potential issues, it is important to disclose these to the buyer early, to avoid eleventh hour deal breakers.
Get the right advice
The process can be long and time consuming, and using experienced advisers allows you to carry on running your business knowing that the sale process is being project managed by people who understand what needs to be done and when, the technical pit falls to avoid and what is commercially acceptable during negotiations. A competent adviser will keep everyone focussed on deadlines.
Do your diligence on the purchaser
Before investing considerable time and energy with the chosen purchaser, it is important to gain comfort on the purchaser’s ability to deliver. The owner also needs to know that the purchaser is the right fit for their business. Emotive factors, such as what will happen to employees, can be just as important as the price.
Ensure that information provided is accurate
Any offer will be based on the assumption that information provided is accurate. Should this be found not to be the case during diligence, it could lead to the initial offer being revised downwards.
Consider the most efficient tax structure
Most purchasers are prepared to be flexible to ensure that the vendor can take advantage of any tax benefits available. Therefore, it is essential to seek specialist tax advice and structure the deal efficiently to minimise tax and any associated risks.
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