Type ‘business for sale’ into Google and several thousand opportunities flash up in seconds.
But the process of buying or selling a business can be riddled with potential pitfalls. Here, Philip Marsden of Vantis Corporate Finance explains how business owners can be sure they are making the right decision to buy or sell, how to get the best price, and the best way to navigate potential tax implications.
Why buy or sell?
The first thing anyone considering buying or selling a business needs to consider is the reason behind the potential acquisition or sale.
The buyer
If the potential purchase has no firm foundation, there is a risk of squandering assets.
Reasons to buy include:
- to increase market share more quickly than through organic growth
- to introduce economies of scale and reduce overheads
- to achieve geographical expansion or increase the product range
- to effect vertical integration of customers or suppliers
- to eliminate the competition!
Planning is crucial. Buying a business represents a significant cost and ties up senior people in the integration.
Proper planning enables buyers to:
- Specify and search for the ideal targets
- Consider whether the buyer has sufficient management capacity to undertake a turnaround
- Ensure favourable funding is in place prior to making an approach
- Develop an integration plan and realistic projections
- Review timings and motives
A good business adviser will assist in this process by researching a shortlist of companies to approach and carrying out some due diligence on risk, value and potential. This not only saves precious time and stress, but provides a dispassionate and objective viewpoint on what may have become an emotive issue.
The seller
The vendor may also have a number of reasons to sell up.
Considerations for the seller include:
- Is selling an unplanned reaction to the receipt of a tempting offer? If so, the seller is unlikely to get the best price and should beware
- Is it the right time to sell? A common error is to sell too late
- Groom the company towards sale
- Prepare a realistic projection of the company’s prospects with supporting evidence
- Share your plans to sell with key customers and management
Getting the right price
Both buyer and seller will be keen to settle on an attractive price – so what are the negotiating tools each party should use to ensure they get what they want?
The buyer
While getting the best price is important, money is often not the seller’s only motivation. To seal the deal, the buyer needs to research the seller’s ‘hotspots’, ie, the things that are most important to them.
To get the best deal, work quickly and give no reason for the vendors to think that they should go through a wider sale process, ensuring that the business being bought is not being approached by other potential buyers. The buyer or his adviser must also complete due diligence on the business under consideration, including management, financial and legal reviews.
The seller
The first thing the seller should do is obtain a fair and sensible valuation of the business. Don’t hold back from potential buyers any negative information about the business such as trading issues or hidden liabilities. Declaring them up front puts the seller in a stronger position to retain credibility.
Even if a seemingly tempting offer has landed on the table, resist the temptation to jump at it. Remember that over a third of sales are now to the business' existing managers, so do not rule out the possibility of a management buyout (MBO).
To obtain the best price, the seller should never reveal what price they want for the business. It will set a ceiling and the buyer will expect to negotiate down considerably from this level.
Taxing times
Tax is a complex area and invariably requires specialist advice.
The buyer
Timing the set-up of a new business to make an acquisition is crucial if you are to maximise tax relief. Managers investing their own money as part of an MBO, can obtain tax breaks on external borrowings (EIS) funding.
If the MBO team is subscribing for shares at less than their market value then timing, again, will be crucial to minimising income tax liabilities. Where losses in the business are to be used against tax, the buyer must ensure that there is no significant change in the company’s trade once the business is taken over.
The seller
The tax position is no less complex for the seller, who needs to consider:
- Whether to extract cash from the business prior to sale – or whether to leave the cash in and add the cash to the price to be paid by the buyer
- Selling existing tax losses or, better still, utilising them pre-sale
- What is the preferred consideration – cash or paper?
- Warranties and indemnities – any claims under a warranty will be grossed up for tax
Conclusion
Buying or selling a business involves many different areas of expertise from securing the most favourable financial banking, conducting due diligence and understanding complex tax issues, to being an ace negotiator, expert valuer and management psychologist! This is notwithstanding the emotional toll that buying or selling exacts.
The key message to buyers and sellers is to plan. Start early, preferably 12 months before you want to start a process of buying or selling. Do your homework, don’t cut corners, and, perhaps above all, make best use of experienced advisers to smooth the course, protect you, and make it happen.
