8 August 2024
In reaction to the Labour Government coming into power in the UK, some clients have asked if now is a good time to sell their business.
Translink Corporate Finance UK Partner Don Gray has shared his insights into some of the key factors that drive sale proceeds and what business owners should do if they are considering an exit.
Don says: “Questions are being asked by businesses around if now is a good time to sell and this is typically being driven by fears of a rise in the capital gains tax rates under a new Labour government
“However, whilst the impact of tax is an important consideration when considering a business sale, there are other matters that are just as important in maximising value.”
Don explores three key factors that drive sale proceeds and what business owners should be doing if they are considering entering the sales process.
Engaging with the right buyers in the right way
- Maximising sale proceeds requires finding buyers who are prepared to pay a strategic premium. Often these buyers may be situated overseas.
- In advance of a sale process, business owners should be thinking about who those buyers might be and what steps they can take to make the business attractive to those buyers.
- On some occasions a business owner may receive an unsolicited approach by a potential buyer.
- Whilst in some cases there are compelling reasons for an off-market bi-lateral process, value is typically maximised where there is competition between bidders.
- The right corporate finance advisor should be able to advise a client on where the strategic buyers are likely to come from, what will make the business attractive to them, and what the optimal sale strategy is.
Being diligent about diligence
- Almost any business sale will involve the buyer commissioning due diligence covering areas such as finance, tax, legal, environmental, insurance, management etc.
- If a material issue arises during diligence this can either lead to a price re-negotiation or at worst the buyer withdrawing from the process.
- Business owners should prepare for diligence before going to market. This involves identifying and ideally remedying or at least mitigating any potential issues before a buyer raises them.
- Building robust foundations through diligent preparation enables sellers to make decisions with confidence when challenges arise.
- Being on the front foot is important and by working with experienced corporate finance advisors and lawyers, business owners can minimise the risk of price chips.
The devil (and the dollars) is in the detail
- A headline offer from a buyer is just the starting point and several very important factors will influence the actual price that is paid at completion of the sale.
- Working capital and its impact on cash and debt adjustments is one of the most common areas where there is a risk of value leakage.
- In simple terms, a buyer will want to acquire the business with as much working capital as possible, whereas a seller will want to minimise this.
- It is not uncommon for the difference in buyer and seller position to be between 5 per cent and 10 per cent of headline price and on smaller deals this difference can be higher still.
- Whilst a good corporate finance advisor will be able to maximise the seller’s position through negotiation, sellers can help by focusing on working capital as part of the pre-sale planning.
- A focus on lean working capital practices (without compromising commercial outcomes) in the 12 months in the run-up to a sale will help support a seller’s position on the level of working capital required to be left in the business.
- Other areas of detail that can frequently lead to inadvertent value leakage are those surrounding completion accounts and earn-out mechanisms.
- Business owners would be well advised to appoint a corporate finance advisor who understands that their role does not stop at headline offers and has the skill set and experience to negotiate the details in the seller’s favour
Don concludes: “Whilst tax is undoubtedly a key consideration for business owners considering a sale there are many other factors that can ultimately influence net proceeds.
“In an ideal world, tax planning is one part of the seller’s armoury that sits alongside diligent preparation and working with the right corporate finance advisor.
“If you are considering selling your business and would like a confidential discussion, we would be delighted to have a conversation about how we can help.”
If you are considering selling your business, contact Don on dgray@translinkcf.com.
