19 March 2019
Many owner-managers undertake limited exit planning, yet the companies that are most likely to sell at the best price are those who have planned properly and where the owners have an ‘investors’ perspective of their own companies.
Prospective purchasers look for well run, quality companies with growth prospects.
If selling the company is the most likely option, then undertaking a properly planned ‘valuation and improvement’ exercise is essential.
Planning points
There are a number of commercial, accounting and legal aspects that can be planned for and which will help maximise value. In addition, taxation planning remains an important consideration in a sale.
The following are the more obvious and common examples of areas need to be considered in the planning process:
- The maintainable earnings should be as high as possible. To achieve this:
- Look at any loss-making activities, divisions or speculative development work which perhaps has a long-term payback period.
- Review any major supply or sale contracts underpinning the business.
- Ensure that any acquisition or investment programme is complete at least a year before a planned exit.
- Review overheads and discretionary spend, but be careful not to cut out anything that will damage the long-term health of the business, as this will be identified by purchasers when they undertake due diligence.
2. Ideally, growth should be demonstrated in the period preceding the sale and in a justifiable forecast with increasing profits.
3. Review items such as freehold properties. Are they to be included or excluded from the deal? Many purchasers will be attracted if there is flexibility within the property portfolio. If the vendor has a particular requirement, then the necessary action needs to be made in advance of the sale.
4. Identify surplus assets or subsidiaries not required for the core trading activities.
5. Identify surplus cash and a mechanism to realise this additional shareholder value.
6. Look at unnecessary capital expenditure or R&D as this may not be fully reflected in the purchaser’s valuation.
7. Consider legal, VAT and PAYE/NIC audits to make sure there are no hidden problems.
Does the business have reliable management information?
The reliability of management information is more likely to be an issue for smaller businesses. However, being small is not a valid excuse when the time for the sale approaches. Potential purchasers will ask for fairly detailed management information including forecasts.
Ensure that there is a suitable management structure with the right individuals in key roles. This is particularly important when it is not a trade sale or the vendor is seen to be key to the running of the business. However, beware of increased costs in the short term without increased revenue, as this will reduce the maintainable earnings.
Owner-managed businesses
If the vendor is an ‘owner-manager’ and involved in the day-to-day running of the business then certain key questions need to be addressed:
- Does the owner wish to remain involved on a medium-to long-term basis after the sale?
- Is the owner fulfilling a vital management function not performed by anybody else?
- After the sale will the motivation remain to carry on working?
- Can the business function without the owner-manager?
Selling a stand-alone entity
If part of a business, for example, a division or a subsidiary of a larger group, is being sold then identify if it can be sold as a ‘stand-alone’ entity:
- Can group functions be replaced?
- Are the buildings, assets and employees separate from the rest of the group?
- Is the accounting information on which valuations are to be performed accurate? Does it reflect all the costs and identify inter-group items?
- Will intergroup pricing policies be maintained after the sale?
- Address matters with dissenting shareholders and ensure they all want to sell. If not, action will need to be taken to ensure they will not hold up any deal.
Finally, give the website a refresh and the factory a coat of paint to improve the image. It all helps!
If you have any questions or would like to discuss this issue further, please do not hesitate to contact me or visit our Corporate Finance page.
Alternatively, contact your usual UHY adviser or fill out our contact form.
