Selling Your Business Seminar

Presented by Ian Benson, Business broker for 15 years, who has sold more than 150 businesses.

Preparing your Business for selling
Do the common sense things. The following is just suggestions for those wondering what course of action to take. Become strategic.
No business is perfect but these are for those aiming to sell.
Make the expenditure including any professional fees and so improve profitability before the final set of annual accounts. Ideally start three years prior to selling.
Avoid putting your foot down and going all out to see sales rise by say 30%. Six months later everything is back down to where it was. A rollercoaster should be avoided. Sellers should only build up businesses in sustainable ways and best to look a solid, steady business.
Ownership model, sole trader businesses can be sold just in the same way as companies. Actually sole traders are liked by buyers because the sale is usually simpler.
Most buyers do not want to buy shares in companies, only want to buy assets and goodwill. They shy away from buying the shares because they do not know what comes with these shares. General advice is never buy the shares.

Best buyer is the one who only wants the assets and goodwill but try and avoid money going into the limited company for goodwill and assets. That incurs corporation tax and then dividend tax.
The difference between good and bad tax arrangements can make a £350,000 difference in a £1m sale.

Task is to minimise the sales into the limited company and maximise the funds to the owner.

Non compete clause has to be signed and paid personally only to you and for tax purposes is an asset (10%) – not worthwhile and not enforceable unless personal.
Handover support – provided by the owner personally – likewise.
Intellectual property includes your website and anything that you might have written like a training manual or internal forms – this can be another 10% to 20%. Domain name may belong to the person and not the limited company. If not currently in your name, you might want to phase in a domain name that you do own and then sell it in two years time.
Note: it is not ideal to use a domain name that is not in your name.
These four items can make the sale of a business much more tax efficient.

Voluntarily liquidating a company counts as disposal of shares. Within six months of the sale that company pays out a final dividend at 10% tax.

When you sell a business you pay 10% tax.
Avoid a 5% shareholding by a key employee because this makes selling so much more complicated.
Avoid holding on to 5% of the shares when you sell, because the tax situation will mean that the 10% rate of tax doesn't apply. You can be an employee or consultant for the buyer.

Maximise the value for your business. A good staff culture and an untapped potential might attract but does not make the buyer pay more.

Making Profits
The most important feature by far. Too busy people don't focus on profit.
Being tight fisted on marketing is possible but this is a miserablist view tends to not deliver.
People who make money, make time available to examine what makes the money and focus on that quite ruthlessly.

People coming in at a higher level do very often achieve higher sales.
Willing to take a risk on marketing to attract better customers, willing to experiment with price and find out what the market is willing to bear.

Not charging enough is a common failing. High margin customers are worth more that low margin customers. The more small customers the better i.e. you don't want to be just selling to ASDA. The more diverse the source of customers the better.

Profit targets: you need to know the cost of delegation. Ideally about twice the cost of delegation. In other words, you might pay someone £50000 to make £100,000.
Value is generated when there is a big differential between the cost of delegation and what it raises. So if paying £50,000 earns £200,000 then the business is worth six times the £150,000 difference = £900,000.

Record customer information but remember this may be subject to data protection.

Activity of the business – make it a thoroughbred, pedigree business focussed on the one thing and do it well. Buyer will probably need to have someone run the business, so simplicity counts.

The lower the workload of the selling owner the better. Make sure that the buyer does not suspect that you are working an 80 hour week. Lazy owners with little talent do better than hard working owner with lots of talent when it comes to sell. A buyer paying £1m wants a steady business that runs itself and generates a good return.
You want a business that continues to make money and business all stop when the owner goes home. That is not valuable.

Need contracts of employment in place etc. proper HR records of staff, pension agreements.
Can the staff be easily replaced – this is what a buyer wants to hear.
Ideally, and in theory, you should be able to half or double your sales without telling anyone to go away. Is there a controllable marketing tool in the business? For example boost your online sales by spending more with Google or employing more staff and selling more. Accepted not every business can do this. A lifestyle buyer likes the ability to turn off and on the business.

Does your photograph or even worse a video of you appear on your website? Is your name in the business name? De-personalise the business so that a business can change ownership without anyone noticing. Specify your job description and it is best if this is as little as possible.

For a buyer buying a business is usually a one off event. Do not worry about the time of year or the economy. Businesses turning over between £1m and £25m are the most difficult to sell. Not always expanding the business is the best way of making the business easiest to sell.

On computing avoid own software and specialist software. Use the market leaders' software.

End of year accounts need to be available ASAP and management accounts.

Directors deprivations – cars for daughters, wife on payroll, racehorses etc. Get rid of these things out of the accounts or itemise personal expenditure covered by the business.

Extravagant expenses – it might be difficult to persuade a buyer that these are taken out of the business. Taking staff to the Cayman Islands etc. Difficult to explain that you knowingly waste money just to pay less tax.

Premises
Buyers buy for different reasons looking for different rates of return. Worse scenario is the premises owned within the sellers trading business. Split up way ahead of sale and run as independent businesses.

Franchising – don't do it unless you can do it properly – can put buyers off.

Conclusion: a business that any fool can run is more attractive!
Needs to have simplicity, delegation, robustness and profitability.

Process of selling a business
4% sell in a year on the businessesforsale.com
In a big city at a reasonable price, they do sell. Remote areas with high price expectations are slow to sell.
Most businesses are not desperate to buy other businesses.
Sometimes sellers pessimistically think no one wants the business. Most businesses will get an offer.
Few businesses get less than six enquiries per year. Key is not to upset everything after just four months, hang on in there. Do not throw the toys out of the pram before you sell it. One off buyers change every few months. Give yourself time, if it takes two years then that's okay.

One in 100 is interested in buying something and maybe only one in 1000 interested on buying your business. You should contact everyone else in the UK in your business.
Don't say anything about your business that you could not prove to a judge in 60 seconds.
If you say that your 1000 customers are all wealthy and reputable but end up they aren't, then you have wrongly described the business properly. Can end up in court cases.
To market the business, create one A4 page describing the business – no puff, no adjectives – just the facts and figures.

Valuation
How much money does the business make for an owner working in the business – multiply that three times.
If business employs a manager and owner doesn't work in the business, multiply by five or six. That is a rate of 16% – good return than other investments.
Investors v working owners. Some are looking to be a hands on owner, some are wanting to be an absentee investor.

Confidentiality agreement
One should be signed before the buyer receives any info about the seller. Buyers or their advisors might ask to see details of all prospective buyers. Be careful how you market. Marketing discreetly is better.
Answering questions from prospective buyers should be done speedily or they could go cold.

Hearing that a seller is a computer buff, smart marketeer who is an expert in their field is not what a buyer wants to hear. Complete opposite of a job interview. Say I work 24 hours a week and I spend lots of time golfing, doing my garden. Do not try to impress about yourself. Suggest that with their expertise, they will probably do much better than you. They do not want performance anxiety – they don't want to hear that you are a genius.

Who are buyers and why do they buy.
People who have money, not businesses like yours nearby. Medium sized out businesses outside of your geographical neighbourhood are more likely. They would get a bigger market place.
Private buyers, young people with rich parents buy businesses to set up their kids.
Sellers of other businesses with a need to roll over tax. Bored, done the cruise and have an ego because they have just sold a business successfully.

Listen to why the buyers want to buy the business.
People usually buy for:-
Diversifying risk
Bored with their current business
For fun, a fresh challenge
Like to go into something that is different or come from an adjacent sector.

Asking Price
A serious buyer will pay a proper price for the business and will pay whatever it takes.
Decide on a figure that you really want and stick to it.
You are not in a rush, you want that figure and do not waver.
In negotiation be honest, discounting is not going to make any difference. It doesn't generate any more enquiries.

Small print in conditions
Always aim for a straight sale and beware of any earn out deal.
Do not allow professional people to handle the entire sale for you because it will be expensive and time consuming. They alienate others involved in the deal and put buyers off. Complicated contracts should not be necessary and are not desirable.

Get paid upfront or you can find people wriggle out of the deal. Paying up over time should be avoided. Staged payments can be tied in to their assets but better to find someone who has the money to invest.

Because of pension funds and people downsizing, there is a lot of liquid cash about.

businessesforsale.com was recommended. Place anonymous ad on that website and there is a very good chance of finding a buyer. Send out to the whole of the UK. Do it on a big scale.

An industry specialist broker can be better if your industry is bespoke.

Handover support should be agreed and specified prior to the sale. If advice is wrong, who is liable?

Plan B
Simplify the business, delegate, take the hassle out of it. Makes the business even more valuable.

Display confidence in your business, portray under no pressure since when they smell blood and things go wrong.

Conclusion: approach in a relaxed way, have patience.