Business Expert: Are you ready for Exit?
26th November 2018
We typically see the exit from a business falling into the following process:
1. Understand the value of the business - business valuation was recently addressed in a previous Business Expert feature;
2. Maximise value;
3. Detailed preparations for sale;
4. Marketing the business;
5. Completion of a sale.
How can you maximise value?
The following value drivers should be frequently considered, however, if you are planning on selling your business within the next five years, these need to be addressed to ensure that your business can achieve its full market value potential.
• Profitability - To be in the best position for sale, your business needs to demonstrate underlying profitability and growth potential. The best scenario for a seller is to demonstrate a pattern of consistent growth.
• Strong Management Team - Does your business pass 'the bus test'? If you were hit by a bus tomorrow, would your business continue to run effectively? If your business can't run itself without you, then this is something you need to address.
• Healthy Cash Flow - With poor cash flow often being the cause of business failure having a healthy cash and working capital position demonstrates that your business has been run efficiently and effectively.
• Barriers to Entry - Barriers to entry will increase the value of your company. Intellectual property, high capital investment and advanced technology are all factors that create barriers to entry which can maximise the value of the business.
• Clear Strategy - A buyer will often want to see that a business has been run with clear strategic objectives in place that management have bought into.
• High Customer Concentration - Business value can be significantly eroded where one customer accounts for a significant portion of your turnover. The ideal remedy for this is to dilute this proportion by winning more customers, however, some businesses may find themselves in a position where they cannot avoid high levels of customer concentration - in this scenario it is best to try and put robust contracts in place, thus providing some visibility of future income.
• Capital Expenditure - Are the assets that are required in the day-to-day running of your business in good shape? Assets should be up-to-date and well maintained to ensure that productivity levels are high and the benefits of this subsequently filter through to improve financial performance.
• Customer Satisfaction Rates - In a world heavily focused on social media, customer satisfaction must be at the forefront of every business owner's mind. Negative customer feedback, particularly on a regular basis, highlights poor customer service which has a detrimental impact on value.
If you plan to exit your business in the next five years or so, and are concerned that one or more of the value drivers outlined in this article may have a negative impact on its sale value, we can help you to get your business in the best shape for sale - and then help you to sell it.
Business Expert: Family and owner-managed companies under threat from Budget rule change
19th November 2018
The surprisingly eventful Budget on October 29 all sounded very positive as it was presented, but picking through the finer detail has revealed a potentially unwelcome trap which could catch out a very large number of family and owner-managed companies.
For some years now it has become normal practice for companies to have a different class of share (commonly known as "alphabet" shares) for each shareholder, as this gives them the flexibility to pay dividends out of profits which do not have to be in proportion to the shareholdings.
This is useful, for example, where it is desirable to pay dividends to certain shareholders in lieu of some salary, or based on other criteria such as new business won by an individual or annual performance related dividends.
Entrepreneurs' Relief has been around for 10 years now, and is designed to tax entrepreneurs at a beneficial 10 per cent rate of Capital Gains Tax when they dispose of shares in a trading company (the intention being to encourage enterprise in the UK economy). One of the key requirements for the relief is that the entrepreneur owns at least five per cent of the business.
The Budget contains a provision designed to stop this relief on far more contrived tax avoidance arrangements than this, but these everyday alphabet share structures could end up, apparently unintentionally, being caught in the cross fire.
The rule change requires that the shareholder must not only own at least five per cent of the shares, but must also be beneficially entitled to receive at least five per cent of the distributed profits.
The trouble is that in the vast majority of alphabet share structures, the flexibility permitted by these share classes means that there is no absolute entitlement to at least five per cent of the profits (even though in practice these shareholders probably do receive at least this proportion).
We are in the process of trying, in conjunction with the professional accounting and tax bodies, to clarify the impact of this change with HMRC. In the meantime it is to be recommended that businesses discuss their ownership arrangements with their accountant to see if they might be affected by this change, and what they may be able to do about it.
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