Get more money when you exit, part I
For many entrepreneurs an eventual sale is the single biggest reason for creating the company in the first place. However, if not planned correctly, business owners could pay up to 40% more tax than they should.
Poor planning, undervaluing your business and failure to master the basics of selling up may all lead to a less than successful transaction. In this article Lesley Stalker, tax partner at Robert James Partnership, presents a practical guide to selling your business.
Plan ahead
Many business owners see a lifetime of hard work ruined by failing to plan their exit. Ideally, exits should be planned as soon as possible, or in cases where the intention is to sell the business after a certain period of time (i.e. two years after its creation), the exit should be factored into the start-up business plan.
Exit options
There are a number of ways of exiting or disposing of a business. Business owners should consider the best option for them in line with their personal objectives. The options are:
• A trade sale
• A management buy out
• Family succession
• Management buy in
• Stock market flotation
• Merger
• Liquidation.
Trade sale
A trade sale is when you sell the business (or parts of the business) to someone else. This is best possible way to get maximum value from your business.
In order to make a successful transaction you should identify possible buyers and work to develop your business for a sale that they will want. Selling your business will be easier if you can:
• Show year-on-year increasing profitability
• Create a high-quality product or service
• Develop an innovative product or piece of intellectual property
• Build a strong customer base
• Recruit a high-quality team
• Maintain premises and assets in good condition.
Know your reason for selling
Part of preparing your business for sale is getting ready to deal with buyers and their questions. One obvious question you are likely to be asked by prospective buyers is; “why are you selling?” By writing down the business objectives at start up, the reasons for selling will be clearer when it’s time for the business to be sold.
It may be that original objectives are no longer valid. Whatever your reasoning, think carefully and prepare your answers – potential buyers can easily spot if you are selling out of desperation!
Understand what you are selling
According to research, only half of entrepreneurs planning to sell their business know how much it is worth. The value of your business will be determined by a number of factors: its size, future growth prospects, diversification, customer base, profitability and cash flow as well as financial management.
While you do not want to undervalue your business you should not overvalue it either.
Selling shares or assets?
The first question to ask during initial negotiations is whether the business is to be sold through the sale of shares or as an asset. This decision will undoubtedly be driven by tax considerations.
In a share purchase the purchaser buys the company along with all its assets and liabilities. An asset purchase allows the purchaser to try and "cherry pick" the particular assets they want to acquire, without acquiring all of the liabilities, (except for employees).
There are other key differences between the two types of transaction, including the form of documentation required for the transfer, tax and stamp duty implications, and in relation to the distribution of the purchase price.
In most cases sellers, primarily for tax purposes, prefer to sell shares and vendors prefer to buy the assets. In practice most transfers of business are done through share purchases, otherwise the sellers effectively pay capital gains tax twice.
The company pays Corporation Tax on the sale of the assets upon which the capital gain is made, and the sellers pay tax when the cash is taken out of the company, either by way of dividend or by liquidation of the company.
