You might also like to consider what it is that you’re selling; whether shares, assets, property or a combination thereof.
Whatever your intentions, disposing of your business will have a profound effect on your future financial plans and there will also be significant tax implications.
Know what your business is worth
It’s important to know what your business is worth before identifying potential buyers. Be pragmatic and don’t set your expectations either too low, or too high. The phrase ‘something is only worth what somebody is willing to pay for it’ may be true, but you need to know in your own mind a fair valuation before the sales process begins.
A valuation is typically based on the profitability of the business, using a multiple of profits after adjusting for certain items, however the choice of multiple and calculating an adjusted profit figure can be challenging.
There are also decisions to be made about exactly which profit figure to use; whether most recent, the average over a few years or even a forecast profit based on your current knowledge.
The valuation would then also generally require looking at the fair value of assets and liabilities on the balance sheet.
Business valuations are very specialist, so it is important to speak to a professional adviser to ensure it is done properly and that you do not end up letting your business go for less than it is worth.
We often advise clients at this point to really consider what they are selling as this can bring into focus a fair valuation, for some businesses it is the business name and customer base, whilst for others it may be some key contracts that have been secured.
Knowing what the buyer is after may also drive the valuation method i.e. if they are interested in some contracts recently secured then valuing the business based on more of a forecast profit figure, as opposed to a historic figure, may be more appropriate.
Acknowledge the importance of objective advice
Whether you’re passing your business over to family or selling up completely, the blood, sweat and tears (as well as years of your life and significant investment) that you have poured into your venture is enough to cloud your judgement when it comes to making decisions ahead of the sale.
You are programmed to always view your business favourably and to overlook the bits that aren’t perfect. That’s why it’s important to work with professionals that can look at your business objectively, help you to position it appropriately, save you time and still get you the best outcome possible.
Get everything in order
If you’ve come to the decision that it’s time to sell up, then it is time to get your house in order. By that we mean going through your accounts in detail to ensure everything is up to date and reconciled and that there are no historic issues being carried forward on your accounts system such as unknown differences on control accounts. You should also review provisions being carried in the accounts and accounting estimates as these types of transactions will invariably come into focus later in the process.
Aside from your accounts, you should also ensure that documentation, paperwork, accounts and reports etc. are up-to-date, filed correctly and easily accessible. This level of preparation early on will make the due diligence process, which comes later, much easier.
These are things which, if not given sufficient attention, can deter those who might otherwise be interested in buying your business from you. You want your business to be talked about as ‘an opportunity not to be missed’ rather than ‘too much of a risk’.
Avoid disaster with due diligence
Due diligence is not something you should shy away from or be afraid of and, when done well, it means both parties can go into the sale feeling positive and assured.
It does, however, involve digging deeper and this is often the part that can be the most time-consuming and overwhelming.
Typically, a selling company will be asked to provide the buyer with information that is necessary to satisfy its own due diligence inquiries and to evaluate the target business.
A business may decide to take care of the ‘business’ due diligence but when it comes to the financial and legal due diligence, many opt to seek professional advice. Should you take this route, your accountant will communicate with the buyer’s accountant, producing documentation and authorising the disclosure of confidential information.
The adviser’s role is to draw your buyers and your attention, respectively, to any stand-out issues, risks or anomalies that might undermine the viability of the deal. Things picked up in the due diligence process can potentially derail the deal or lead to negotiations on price, so this part of the process cannot be underestimated.
Due diligence can also be carried out the other way as the selling company may want assurance as to the financial position of the buying company, especially if the proposed deal involves deferred consideration.
Transactional tax implications
Tax is an important consideration at every stage of the transaction and your liabilities will undoubtedly be impacted by your business structure, but also by how you choose to structure the sale. There is often a trade-off here as it is usually more tax efficient for the seller to dispose of shares but more attractive for the buyer to purchase the assets of the company.
The tax position on selling a business can be extremely complicated and you may even need to consider the tax consequences for the business, for you personally and for the buyer.
