After a lifetime of hard work, you make the big decision to exit by selling or merging your business, and it’s not a decision that should be taken lightly. It is of paramount importance to get things in order before announcing the sale and to contract with the right lawyer, financial planner, and business advisor. This can make all the difference.
Discussing this subject, Jonathan Grant, Partner and Head of Corporate at DMH Stallard; Nicholas Lovelock, Associate Director, Corporate Finance at FRP Corporate Finance; Michael Pay, Director of EMC Corporate Finance; Gregor Watt, Managing Director at HJP Chartered Financial Planners; and Sarah Alexander, Managing Director of Lewis Brownlee Chartered Accountants.
There’s a variety of things to consider – is it a straight sale; an equity swap; or an employee trust arrangement? In every event, what’s the earn-out situation? So turning to Mike first, what are the things business owners need to bear in mind for planning their exit?
Michael Pay: When you’re going into a sales process, having good data will ensure a smooth process. You will need everything from accounting records, employee records, and customer records, plus you need the capability to go in and compare and contrast trends to ascertain how the business is performing.
Gregor Watt: We like to start with ‘the end’ in mind. The biggest challenge we have is to get owners to step away from their businesses for long enough to work out why they’re doing it, and what they want their life to look like when they do have that exit. For a lot of business owners, it’s the first time they’ve ever been asked those questions.
Let’s imagine money’s no object, and it’s the first day after you’ve sold your business, so you don’t have to go to work. What are you doing now? Have you decided how to fill your time? I often see stunned rabbits-in-headlights looks because all they’ve thought about for the last 20 years is their business.
MP: Also, in many cases, the pandemic changed the relationship between the owner and the business. Now, business owners are much more willing to let go of the business, because of the more considered ‘spending time with my family’ issue which Covid brought into focus.
Jonathan Grant: The entrepreneur mindset, though, is very tied to their business. Although life is more flexible now, it’s still built around it. I’ve got a client in his mid-70s. He’s selling, having founded and run the business for his entire career. This is now going to be a real challenge for him.
One of the key questions to start with is, ‘What do you want out of a sale?’ It’s a question that is asked on an emotional level, as well as a financial one. Do you need to walk away straightaway? Could you cope with working with a buyer for three years of an earn-out, for example?
MH: Sarah, what are some of the highlights you need to focus on for someone who needs to sell their business?
Sarah Alexander: You can’t plan early enough. It’s a good, solid two-year process to get to that sale point. The buyer’s due diligence will look back two years. In terms of getting all that data together, you’ll need to be working with the right people around you. It consumes so much time, especially when you’re still trying to run the business. Also, you have to be careful
that the word might start getting out, and your staff gets unsettled.
Nicolas Lovelock: That’s one of the most dangerous things – trying to keep it quiet for the clients, the customers, and the staff because that creates uncertainty. The thing that retains the value in the company is making sure that your focus is on running the business, and it’s key that you keep that to yourself, and don’t let too many people in on what you’re doing.
In preparing the business for sale, a vendor’s due diligence is quite a lengthy process – and you do need to go through it – so you also need to look at whether exiting your business is going to generate sufficient value for you. What is the next step in the business, and what do you do between deciding to exit and actually exiting?
GW: As a separate but related issue, the first question I ask a vendor is ‘Have you got power of attorney?’ And if they haven’t, I send them straight to a solicitor. Several deals that have fallen at the last hurdle have been because something happened to the vendor, and he wasn’t able to sign the contract. It’s a small piece of documentation, costing £800, to ensure a multi-million-pound deal.
MP: If your business is run well, and all documentation and contracts are up to date, and you put in this good practice on an ongoing basis, then when someone does come knocking, you’ll always be in a good place.
SA: Your value will be a lot better as well because you’ve got all of that data; years of it, all ready to go. Often the decision to sell isn’t as obvious as ‘I’m going to sell the business.’ It’s often an email or phone call that says ‘Let’s have a conversation’. An offer can come in when you’re not expecting it, so if you’re in a position where someone wants to make you an offer, and your management accounts aren’t up to date, that buyer will wander off somewhere else.
GW: If we’ve been advising a business owner for a period of time, we’ll already have information that’s essential to our job because we can’t, for example, calculate pension funding if we don’t understand their profits, remuneration structures, or management. These
aspects are non-negotiable.
JG: That’s what many business owners don’t get. They glaze over when you say you need to get everything in place when all they’re doing is waiting for a great offer. But if they receive a great offer, and they don’t have the data, the selling price merely gets chipped away.
MH: The point for a business owner is having the time to prepare documents, which will mean not being able to run the company.
MP: That’s where you have corporate finance advisors, who will take the data, run the process, and take the burden off the owner. They will work with the lawyers to push certain elements through, while the business owner can get on and run the business. You’re going to have to dedicate a certain amount of time to it, but at the end of two or three months, the paycheque will make it worthwhile.
NL: It’s important to plan, for the sake of the business, even if you’re not going to exit. You’ve almost got to run things in parallel. You’ve got to drive that profit which ultimately will drive the value. So even though, on one side, you’ll be putting steps in place to exit, you’re also driving it forward to grow the business on a day-to-day basis.
JG: One thing that’s started changing, is that a lot more businesses have more share options. The diversity of share option holders is quite wide, so you’re going to have to talk to these people ahead of the transaction because they need to exercise their share options. They should want to sell because they’ll make a lot of money but they must still be consulted. You can’t just keep them in the dark.
MH: When it comes to calculating a price, how do multiples work?
SA: It depends. There are industry norms, where if you can get that data, you can compare your business to a similar business, and work out the level of expectation. You’ll get higher multiples when you’ve got regular, recurring, predictable income, or where you’ve got a robust business plan, and you can demonstrate that this is recurring.
We had a situation where, through the two-year sales process, we got more and more information on the selling company, and realised that there was this one part of the business that was generating the income stream, so that’s where the multiple is.
NL: Additionally, multiples are often sector driven. Some sectors have done very well over the last three or four years, while others haven’t done so well. But also, concentration is an issue. If you’ve got one large customer driving 60% of your gross profit, you will have to consider what happens if you lose that customer. You need customer dilution to drive value.
MP: But equally we’ve learned that some buyers like large customer concentrations, because they can swallow it up into their big organisations, and they don’t want a company with lots of small customers. Other buyers, however, may not want a company where a customer makes up more than 15% of the profit. It’s about understanding what the buyer’s rationale in the process is.
MH: So your job is to matchmake, effectively?
MP: I’d say our job is to provide choices. We’re going out to market and we’re giving our clients a choice of decisions that need to be made. And if you can get multiple buyers, then you create competition, which will increase the price.
NL: What also drives the price is whether this is a strategic buyer or an opportunistic buyer. It could be somebody who wants to take a competitor out, so they might pay a greater value than someone who feels it might be ‘a nice business to have.’
MH: When I speak to a lot of businesses, most of them either greatly undervalue their business or hugely overvalue their business. Do you see it as your job as advisors to force a bit of reality onto them about what their business is actually worth?
NL: One of the important starting points is to advise owners what the value of their business is. Many business owners think their business is worth more than it is.
MP: That’s where a properly run sales process will drive out value. You may get to a point where you have acceptable offers or unacceptable offers, or you haven’t got any offers, for whatever reason. So having gone through that process, you find out what the buyers are interested in, which will then influence your next strategy, and you will end up with a true value of your business’s worth. That’s what we mean by choice.
The only time you can tell what your business is worth is the offers that are on the table. The seller presents the data and information, and it’s the buyer who comes back and says how much it’s worth.
We had a client come to us a couple of years ago, who was going to accept a certain offer. They asked us, ‘Is this a good offer?’ We said, ‘We don’t think it is.’ We went to tell the buyer that we would start talking to other potential buyers, and they came back, 24 hours later, with double the original offer. The business was always worth double; it had merely made the buyer honest.
NL: That’s the value of having advisors on board. They can negotiate with those buyers. A buyer is not going to pay more than they want to pay. But as you go through the process, and you have those discussions, provide them with certain information that says there is huge growth potential, and a better price can be had.
MH: My next step in the process is to issue NDA (non-disclosure agreements). Are NDAs worth it?
JG: it’s a good idea to have them, though they’re rarely enforced. It depends on who you’re dealing with. For instance, a professional buyer of businesses will need to maintain a reputation in the market. Ignoring an NDA will damage their reputation – and that’s more important than the actual document itself.
In terms of how much information you provide, even with an NDA, you shouldn’t release it all at the beginning of the process anyway. To start, you release high-level information, which summarises the business, and gradually add more detail as you go through. The more you agree, the more sensitive information you can release.
Plus you don’t want potential buyers to start sniffing around the staff for information. You’ve got to be really clear about what buyers are allowed to do.
MH: With all this in place, what’s my next step?
GW: While we don’t get involved in any valuations, we’ll go back to starting with the end in mind. If we can get to a place where the owner understands the lifestyle they want to lead, then we can put a number on it.
So we’re empowering them to go into that discussion. I’d then go to people like those of us around this table and insist they work with this individual to develop their business so they can get the price they need to get the lifestyle they want.
JG: Would you say some people come up with an intuitive idea of value, rather than doing the process you’ve described? They might have in their mind, say £10m, as the value of their business. But they then don’t do that exercise that you’ve described, which means they might have to settle for £5m.
GW: The biggest part of what we do is getting them to that place where they have decided what the lifestyle is they want to lead. They might want to spend three months a year in Val d’Isere or buy a home in South Africa. We can put numbers around that.
It’s about getting involved early. The accountant and solicitor will have been working together on the business for years with the owner, so the sale of the business becomes a natural end of that process. You’ve had conversations with the owner about the lifestyle they want to lead, and what their walkaway figure is. If it’s £5m, but you’re only offered £2m, that’s no good. But if you’re offered £10m, well - where do I sign?
MH: So I know the value of the business, then let’s say it equates to my choice of lifestyle. I’ve got my data in order, I’ve got my NDA, what’s my next step?
MP: It’s probably best to take a step back in this process. A typical process of selling a business, from beginning to end, will be around about six to 12 months. The first six to eight weeks is a two-way information-gathering process. We will ask a series of questions about the business to compile a confidential information memorandum. At the same time, we will be looking for a buyers’ pool.
At the end of that six to eight-week process, we will present this memorandum, which captures a snapshot of the marketplace. The memo will be about the company, and it should give limited but sufficient information for a buyer to determine whether they’re interested, and at what likely price levels. The buyers’ pool is designed to identify all those people. You then go to market, and that’s when you bring in the NDA.
In truth, if you’re talking about a buyer with a cheque for X million pounds, they’d probably have more knowledge about the industry than we do, which is why they’re interested in the first place. Incidentally, when it comes to the NDA, most buyers will adhere to that as they don’t want to alert rival buyers to the process.
GW: The other thing about getting ready to sell, you need to understand what’s going to torpedo it; what the risks are.
MH: So with everything in order, I’m waiting for someone to pop out of the woodwork to enquire about my business…
MP: That’s something slightly different; you’re talking about being passive – we act in a pro-active manner. We approach buyers on a confidential basis, saying, ‘Here’s a one-page summary document – is this of interest?’ We’ll be discussing with those interested
potential buyers, and then report back to the company.
We work out who the most appropriate buyers are, what their purpose is, and look for the best match, and we do it in a way that doesn’t offer up any names or companies, giving us deniability if a potential buyer tries to work out who the selling company is.
NL: After that, six, eight, 12-week period, we’re now having those discussions with potential buyers. The thing for management is that a buyer wants to have a conversation with the management team. Typically, a lot of these are done on Microsoft Teams. You spend these meetings finding out what’s what, but the important thing is you’ve got to keep running your business during that time. And that’s where an advisor comes in, because we will do all the heavy lifting in the sale process, while you focus on your business.
MH: I find it odd that as a business owner, I’m asked how much I want. Because how much I want is not relevant to how much the business is valued at. I might want 30 million, irrespective of the value.
GW: The most common answer you get is ‘… as much as I can get.’ Brilliant, thanks for that. It’s like, say, ‘tea or coffee?’ ‘Oh, whatever…’ It’s not helpful because it doesn’t achieve anything, which is why we go to the back end of the process and paint them an image of what retirement looks like. If we can get an idea of what it looks like, we can cost it.
And if your advisor says ‘It’s not worth that much, but this is what you need to do to get the value up to that point,’ you’re going to stay fully engaged in the process, because you’ve now had that dream future painted for you.
NL: As a side point, a lot of small businesses are reliant upon their owners, in terms of everything that happens in the business – the growth, the driver, the operation of the business, and so on. As part of that journey, business owners need to think about, ‘Who sits below me? If I wasn’t here, how would this business run?’
GW: That’s exactly one of my points when talking about risk. If you have an owner-manager who’s the key driver of most of the turnover, and the profits of the business, it’s all very well for him having everything in place, and then he gets hit by a bus…
After that, nobody wants that business anymore, not at that price. So are the right people protected in the organisation so that the deal doesn’t fall apart? It’s an extension of talking about the power of attorney.
SA: If you’ve got one person who is doing absolutely everything, and driving that business forward, that’s great for generating really good returns right now. But they are going to exit, so what they need to be doing is stepping away in that two-year run-up. In effect, you need an elongated management handover.
GW: There’s the potential for an even bigger risk if the key individual isn’t the owner. For example, you may have a Sales Director who’s responsible for driving all the turnover, and has all the relationships but isn’t a shareholder in the business for sale. And then something happens to that key individual, what does that do to a buyers’ valuation of the business then?
JG: You need to tie those key people in, but you could still have two or three key people in the management team decide they don’t want to be involved in the sale, and leave the job. As a business owner, you may have a great offer, but not if your key team members just fell off the path.
MP: Equally, if you tie them in too much, the buyer’s risk is then that they’ve just got a big cheque and they decide to leave. So you’ve got these issues that need to be taken step by step.
You may hear lots of advice about how a management team is key. However, not all businesses are of a size that is suitable for management teams, and not all business owners are good with them. Not every company structure will appeal to a given buyer. If a company has a dominant owner or MD, and everyone else is merely a foot-soldier, a management buyout isn’t going to happen. So we look back into the buyers’ pool.
It may be that a trade buyer, who already has a regional Managing Director who can step in and fulfil the role of the owner, can still maximise the value of the business. So it’s understanding the nuances.
JG: The owner or the majority shareholder can be a real asset and driver for sale. In many cases, buyers quite often will buy a business because it does something uniquely well, driven by the owner or the founder.
MH: Due diligence. Before we discuss it, Jonathan, please explain what it is.
JG: It is making sure that the paperwork and the processes that you have to run your business can demonstrate that you’re following all the rules and laws that you should be. And that, assuming due diligence is carried out, the buyer of your business isn’t going to have to repair a lot of things and spend money putting that business back into the condition it should have been in.
MP: This is the first point of due diligence – which is why financials often come first in the process. It’s to verify that the information that they’ve made the bid on is accurate or reflective.
MH: Would this be down to projections? ‘These are my results from the past five years, and this is what will happen over the next three.’ And those projections will have been proven to be pretty accurate.
NL: That can then go into the deal structure, once you’ve identified a preferred bidder. Deal structures can vary, depending on businesses and sectors, and how much
of it is on forward revenue.
JG: That said, it’s very difficult to be paid for future growth in revenue unless it’s guaranteed. So unless you’ve got fixed-term contracts, which are nailed down, and you can see how that revenue is going to be generated, it’s not going to happen. And that’s where earn-outs come in.
SA: But then, no one can ever say, ‘That’s the forecast, and this is exactly what is going to happen.’
MH: With regard to earn-outs, is everything done on an ‘earn-out’ basis? Is there ever a cash deal up front, and ‘walk away’?
MP: 90% of our deals will be cash. They’re not always a ‘walk away,’ but they’re getting the value, on day one of completion of the business, in cash.
NL: We’ve got something like that at the moment. That is, ‘all cash’ at completion for a very substantial amount. The only condition is that they want the owners to remain in the business for 12 months. And that’s to do with the transition of management and staff, and handover to the new buyer. And that, in turn, is because they’re an overseas buyer coming into the UK market, and a need to understand the business here.
MP: In that example, the money that they receive on day one will not be impacted if, on day two, they turn round and say, ‘You know what? I really don’t like working here. I’m going to go.’
MH: So the earn-out is primarily designed to bridge evaluation in terms of, ‘the owners have got a year to finalise the buyout or the earn-out’? And that gives them a year to check everything was kosher?
JG: And also to drive further growth. What the buyer wants is for the exiting seller to demonstrate that the business is going up in terms of revenue and profits, and will carry on doing that after he’s bought it. This will then give the buyer time to take the business on.
MH: If the earn-out is based on hitting those targets, and the next year you only hit 70% of that target, presumably, that gives the buyer the right to reduce his price?
MP: We have an owner who wants to sell, but at the point of sale, knows it isn’t worth what he wants for it. Meanwhile, the buyer wanted to take advantage of the market opportunity. He says, ‘I can pay full value for the business today, and then offer a generous earn-out.’ Assuming they cleared all the hurdles, this will be £10m over three years. If they don’t hit that, there is a ratchet, but it’s not a cliff. It’s incremental.
GW: Sometimes it’s not about profit generation. We’ve bought several financial advisor businesses in the past. And we’ve never done it as an upfront deal. It’s been 50%, then two lots of 25% over the next two years, and not tied to profitability. It is providing a service to hand over the business while introducing your clients to their new advisors because that’s the relationship your clients have with you.
MP: Sometimes industry sector can affect it. If you look at professional services – it’s hugely aggressive. We work for an accounting firm in that sector, and they will be looking, typically, at something between 60-75% upfront, and then the rest will be as an earn-out because they’re trying to encourage you to retain the ownership of the people in the business.
JG: Also, if the buyers’ market is less confident, as it has been in the last two or three years, with a lot of uncertainty around international markets, more of them will try to put more of the price on earn-out. We’ve seen a few offers that have been 50% cash, 50% earn-out, which isn’t as attractive to the seller.
We’re now just getting to the point where the market is starting to turn, and there’s going to be more pressure on buyers to be attractive to sellers. Therefore, more of the price will be upfront, and less will be on the earn-out.
SA: This ought to encourage the seller to stay engaged, as they have to pay all the tax at the point of completion, not upon receipt of cash. It’s partly mitigated by the fact that Capital Gains Tax (CGT) rates are relatively low at present. For the first million, assuming you’ve not had any other gains, it’s 10%. After that, it’s 20%.
All of the tax burden falls during the tax year that the deal happens, even if you don’t get paid for several years. If, ultimately, you don’t get the full proceeds, then you can claim that tax back later. But from a cash flow perspective, it can be tough.
MP: Also, tax should not be the tail that wags the dog. It’s not the driver when you’re looking at exiting your business.
MH: What else do I need to put in place before I ask my advisor to go to the market? Do I need my Intellectual Property (IP) documents in place so that everything I am selling is protected?
JG: We normally recommend that people do an audit of their business, and work out what the key value drivers are. Go through the whole of your business, check all your employment contracts, your IP, property ownership, title, deeds, everything. For most businesses, there are two or three things that are going to drive the value. Those are the areas you should focus on.
MH: What’s the difference between a management buyout (MBO) and an Employee Ownership Trust (EOT)?
MP: There are three types. One is a vendor-backed buyout, but with them choosing the management team. One is passing ownership to a trust where all the employees benefit in the future. And the other is a financial institution buying into the business.
The first is where the vendor is supporting the management team, probably through a combination of the company going to get bank debt into the business, releasing some of the equity into the seller’s pocket, and then over a period of time, transitioning and being paid out on that.
Most EOTs are exactly that, but the difference is that all the employees are engaged. And although you pay no CGT, the employees will suffer the tax on their exit. Fine from a seller’s point of view, less so from the buyer’s.
In the middle of that, you have the MBO. This is where a professional investor will be coming in and taking a stake in the business, backing the management team to buy that business. It gets quite involved as to how capital is raised to buy the business, but there are many ways of doing so.
MH: So looking at the various types of sales, how do I decide which is the best route?
JG: It genuinely depends on the circumstances, for buyer and seller. A management buyout may be a good route for you. Similarly, the option of supporting the management team during a transition may be attractive.
NL: Over the last few years, we’ve done what we call a partial exit, which is a softer version of an MBO. This is where the owners give up some of their equity stake to take a bit of cash off the table, while effectively retaining an equity interest in the business during the transition period from owner to management team.
JG: If you compare it to an earn-out, where a buyer is deferring a lot of your money in a management team situation like that, you’re dealing with people that you happen to know, and you can have a little bit more control over the process.
MH: So I’ve got a buyer for my business. My advisor has worked it all out and it sounds good. The next thing, Gregor, is ‘What do I do with the money?’
GW: Good question. When the deal goes through, for us, isn’t the end of the relationship – it’s merely the midpoint. The first issue is, how does the figure you’ve received match up against the lifestyle you’ve wanted? And if you’ve received more – brilliant!
What do you want to do with those surplus funds? Are you leaving extra assets legacy for your kids? Are you interested in a bit of philanthropy? Do you intend to set up a charitable foundation? Or are you just going to spend it all yourself? It’s about structuring it the right way.
One thing most people don’t realise is you’ve turned a very valuable asset that’s exempt from Inheritance Tax (IHT) into a pile of cash that isn’t exempt. With your £10m windfall, if you get hit by a bus, your kids are only going to get six of that. So it’s about how we structure that retirement income strategy around achieving what you want to do.
MH: What will be my tax liability on that?
SA: CGT is currently 10% up to a million, and then 20% over a million. And when you die, there’s no IHT to pay on the value of any shares you’ve handed on. Cash in the bank, however, is subject to IHT.
MH: What if I sell part of my business? The assets that you’re selling, that money is coming back into the business, then the only thing that it’s subject to is Corporation Tax. Is that correct?
SA: It depends. What we’re seeing more and more of is where you have a holding company and an operating company. In this instance, the holding company owns the operating company. If you sold the operating company, then because of Substantial Shareholder Relief (SSR), there will be no Corporation Tax for the holding company to pay.
MP: So you’re now locked with a cash shell. And it’s often referred to as a FIC – a Family Investment Company, which can then use that money to invest. It’s only when that money comes out of the FIC that you are taxed, and you’ll be taxed at Income Tax rates.
SA: It’s also prudent, if we’re talking about that kind of business structure, for people to look at how their businesses are organised. Have you got the right structure in place in terms of holding company subsidiaries? If the holding company sells a trading company, then you can claim this SSR, so there isn’t any Corporation Tax. They’re just selling off that trading company to somebody else. The gross proceeds then go into the holding company, and you decide on what you’re going to do with that.
If you’re simply just going to liquidate that, then you’re exposing yourself to tax. Likewise, if you’ve converted the shares into cash, then you’ve got the same IHT exposure. However, if those assets remain in the company, depending on what that company does, there may be some relief in terms of IHT.
JG: In the difference between an asset sale and a share sale, most entrepreneurs and sellers want to share sale, because they will then receive the money personally, and they get the benefit of Business Asset Disposal Relief (BADR) – ideally 10% on the first million.
If a buyer says they want to buy the business and assets from your company, effectively meaning ‘everything’, the money will then come back into the company. That’s when you’ve got to decide what you want to do, in terms of which taxation route you are best off going down.
MH: Are the rules on inheritance still the same; more than seven years before I die, and there’s no taxation?
GW: That’s linked to gifting. There are several options and solutions out there, and each has its own features, benefits, risks, and rewards. It is about tailoring that package to what’s right for the individual business.
‘Seven years’ is one option; there’s also a zero-year option where you can simply reinvest in an alternative investment fund that itself qualifies for business relief. So it is possible to make that instant IHT liability go away immediately. But that comes with a pretty high-risk investment strategy, which may not be suitable. In this case, you may be looking at seven-year solutions; combinations of gifting to kids, different types of trust, and so on. It’s going to be dictated, to a degree, by what amount of income and access the vendor wants from that capital sum.
NL: It’s about how to structure IHT savings, and deliver the income they want to have for the lifestyle that they desire. You then need to adapt that plan when it turns out they’ve developed some more expensive habits than they thought they had.
MH: When it comes to the sale assets, your spouse is entitled to 50% of revenue in the business, one presumes?
JG: It’s slightly different from that. But if you suddenly receive a large amount of money, and you then get divorced, the divorce rules will broadly say ’50%’.
SA: There are some owner-managed businesses where the woman is the leader and head of the company. However, from a tax planning perspective, some of the shares are held by the husband. Then the business is sold. And they’re looking to claim BADR, to get this 10% rate. There are rules around the ownership of the shares – there is a minimum percentage and a minimum amount of time that you’ve owned those shares. In 2019, the rules were changed a bit, so that now you have to be an officer or employee; just being a shareholder of a business means you are not eligible for BADR. So if you’re just below any of those shareholder thresholds, you won’t get BADR, which may add a further 10% tax on your rateable amounts.
JG: Back with gifting, along similar lines, as you decide you want to give a couple of million quid to your children, are you comfortable with that? If they’re married, or if they’re going to get married, what are their partners like?
The planning can save an awful lot of emotional problems within families. Imagine you’ve spent the last 40 years building and running a business, you’ve been working hard on it, everyone’s had a good life, but you’re not a millionaire. At that point, you’ve now suddenly got £10m, and the way your family looks at you changes. So you have to plan, and let everyone know what’s happening, otherwise they’re all suddenly holding their hands out.
NL: In some respects, that is the starting point of all of this; they need to have those conversations.
GW: We actively canvass for the next generation – as a minimum – to be in the room for these conversations; with the vendor’s permission.
MH: I’d be interested in your final thoughts, including anything we may have missed.
SA: It is all about good advice, as early as possible. But it’s also about good relationships. So your lawyer, financial advisor, or accountant – before you bring in the people who are going to sell your business – is going to need to be the right advisors who know you and your business well enough to know your aspirations.
As an accountant, the due diligence will be all about what’s this number; what’s the accounting policy for this; VAT; PAYE; Corporation Tax, share schemes, ATED* (Annual Tax on Enveloped Dwellings), and so on.
*A residential property owned by a company
JG: The mindset of the owner is really important. You often see this when an owner gets an unsolicited approach. They’ll get a fantastic offer for their business and they suddenly think about selling when they haven’t prepared for it. Often those deals don’t end up happening because the seller isn’t ready to let the business go. A good advisor will try and control that process and say ‘We need a bit more time to prepare the data and get everything ready for you.’
MP: Just because it looks like a good offer, don’t necessarily believe it is a good offer. Additionally, a good buyer will never go away. They will have a corporate finance advisor because it makes the process easier for them. Unless something particular has happened to them on a macro level, they’ll always be there.
NL: When buyers are trying to push owners into selling the business, do they just want to buy it cheap? So the first thing you do is to talk to an advisor.
GW: We would always be really cautious about somebody who potentially relies on a future business. We always actively encourage people to do their financial planning on the assumption that a sale never happens. That way, if it does happen, fantastic. Meanwhile, even if that sale never materialises, you’ll have at least sorted out your future financial planning,
JG: Additionally, being prepared means if you want to exit your business, you have more options, so that if the first one doesn’t work, you’re ready for the next one. It facilitates a better exit.
MH: Thank you for your time. I greatly appreciate it.
