Archive for the ‘Exit Strategies’ Category

Almost a quarter launch businesses with a sale in mind

Monday, February 26th, 2018

Almost a quarter of entrepreneurs starting their own businesses do so with the aim of selling the business at a later date.

This is according to a new study by business financial planning service, Jazoodle. It found that 23 per cent of those starting their own companies have their exit as their primary aim, with 83 per cent of these claiming that selling at a profit is their main motivation.

Exit strategies: plan for the door from day one

Friday, June 13th, 2014

How and when to build an effective exit strategy has been a matter of contention for decades and it will continue to be debated for decades to come.

Often plans to sell a business are left too late – the strategies are drawn up when the owner wants to cash in on his or her company or they simply want to wash their hands of a venture that has proven less enjoyable or successful than they had hoped. But usually the best exit strategies are the ones that are drawn up in the early days of the business.

Richard Spink, corporate finance partner at Burges Salmon, wrote in an article published earlier this month that “it’s never too early to plan for the exit”. Indeed he stressed that it is an integral part of the business plan – having an idea of the end goal and how you would go about marketing and selling the company is essential as you look to grow.

John Bromley added on “With the constant stream of successful start-up acquisitions hitting the headlines, many entrepreneurs are now starting their businesses with a three-to-five year exit in mind.”

Within this strategy there are some key considerations to bear in mind. The first is to stay on top of bookkeeping; this will enable an entrepreneur to easily prove to a potential buyer just how profitable the company has been. Poor administrative records will only hinder the process or scare aware buyers.

Marketing the company in the right way by building a brand that gives the business a clear and coherent place in the market is also important. The more recognisable and successful the brand the easier it will be to sell it on to a new owner.

From valuing the business through to picking the best time to sell it, regular reviews of an exit strategy are often urged by industry experts.

Buying a business for the first time: 5 questions to ask yourself

Wednesday, November 21st, 2012

Buying a business is a big decision to take and, while the rewards can be huge, if this is your first time buying a business it is worth looking at your personal situation to ensure you are prepared for the upheaval that can also come with such a change. Here is a list of five questions worth asking yourself early on in your hunt for a new acquisition.

1. Are you ready for the lifestyle change?

Running a business is a hugely rewarding endeavour. You will reap the profits of your efforts directly and will be in control of your own financial future and career. But these benefits come with costs, namely time and risk. Make sure you and your nearest and dearest are aware of and prepared for the demands that owning your own business can put on you.

2. Who will run your business?

Once you've decided you are willing to accept the responsibility that comes with buying your own business, you can consider your options in terms of making daily life easier. If you're happy to be accountable for the daily running of the business you should be able to save money on management staff. But be prepared to be on-call whenever you're needed. With this question, you may well have to be open to negotiation depending on the individual business, but it is worth deciding what your preference is in advance.

3. Is now the right time for buying in your sector?

Buying a business is a big step, especially if you're a first-time entrepreneur. So don't rush into it. The economy is still struggling at the moment and some industries are being particularly hard hit. Take some time to weigh up what kind of business you want to own with which areas of the economy are most profitable at the moment. Anytime spent waiting for the your preferred industry to return to growth won't be wasted, you can monitor the market and current opportunities to ensure the business you buy in the end is the right one at the right price.

4. Does your investment add up?

Essentially, make sure you do your sums. If you can't afford to invest in a business with your personal funds, then think carefully about borrowing money… and how and when you will repay it Overlooking financial discrepancies now is going to hurt a lot in the future so don't rush this stage.

5. What is your exit strategy?

Finally, something many first-time entrepreneurs neglect to consider early-on in the buying process is an exit strategy. If you have any partners involved this is even more important because you will need to establish a buy-sell agreement to ensure you all have a way out. You also need to be aware that you could well have to get out sooner than expected if your personal financial situation changes, so write this into your plans.

Another tax on success for UK business owners

Sunday, March 11th, 2012

Winding up a solvent company just got a little more complicated. Before 1st March 2012, if a company wanted to wind up operations and distribute surplus funds to shareholders as capital payments, it was a simple case of writing to HMRC for a concession (ESC C16). Once all the assets are distributed (cash returned to the owners) then a letter can be sent to Companies House, requesting that the business be struck off the register.

Under the new legislation the maximum amount that can be treated as a pre-liquidation capital distribution is £25,000. If the amount goes over this figure, the entire amount (including the original capital) will be treated as income.

Of course there is a clear advantage in distributing surplus funds as capital payments rather than revenue is that they attract capital gains tax rather than income tax. In many circumstances Entrepreneurs’ Relief could be applied, with an effective tax liability of just 10 per cent over and above the free allowance of £10,600. Paying the funds as a dividend is not a problem for basic rate taxpayers (20 per cent) as there is no further tax to pay personally. But for those higher rate taxpayers (40 per cent or 50per cent), there will be additional personal tax liabilities of 25 per cent and 36.11 per cent respectively.

So unless capital reserves can be reduced to under £25,000, the only real option for business owners is to appoint a liquidator. The liquidation process will ensure that all distributions are treated as capital. But there is a considerable cost involved which can vary from around £5000 to £10,000. For many owners of small to medium companies, this is just another hefty outlay, and has been described by some as a ‘hidden cost of retirement’ and by others as a ‘tax on success’.

Business founder share dilution over time

Thursday, October 13th, 2011

Came across a wonderful graphic put together by Mark Shuster of VC firm, GRP Partners, that shows just how much a founder’s shares in a business can dilute over time following a series of capital raising initiatives.

Of course your share of the company is going to shrink if you sell off chunks of capital. Many start-ups couldn’t get off the ground without having to raise money at the outset. And raising money no longer includes bank loan finance. Which means shares have to be surrendered.

The hopeful aim is that the money raised will lift the overall value of the business, so that your smaller share of a larger business is ultimately more valuable than a lager share of an uncapitalised business.

Example. You own 40% of a company worth £1m, i.e. £400k. You raise a round of VC, say £2m on a pre-money valuation of £4m, equating to a post-money valuation of £6m. You get diluted by 33% (£2m / £6m) so you now only have 26.67% of the company. But the company is now worth £6m and your 26.67% share is worth £1.6m, a gain of £1.2m.

But then the company grows and further rounds of finance are required. The following graphic shows just how dilution adds up and can sometimes mean that the founders original personal financial expectations might not pan out so well in the end. It’s US-based, but the general math can be applied in the UK. Also remember that in the UK, if the founders are ultimately left with less than 5% each then they become unable to claim the preferential 10% rate of Entrepreneur Relief upon exit, instead being hit with the standard 28%.

Share dilution graphic

What will the March 2011 Budget mean for Entrepreneurs?

Monday, March 21st, 2011

Should entrepreneurs and business owners around the UK expect more from the 2011 Budget than a reduction in red tape?

It certainly ought to deliver more for the business community to justify its ‘Budget for Growth’ moniker.

The final report of the Office of Tax Simplification (OTS), which reviewed the UK’s tax reliefs and allowances, concluded that ‘whole areas of tax law are particularly complicated’ and that ‘many areas may need a more in-depth review’.

One of the central recommendations of the report is to merge national insurance contributions with income tax. But of particular interest to entrepreneurs and investors is the recommendation that conditions for investing in Enterprise Investment Schemes and Venture Capital Trusts should be standardised and simplified.

What will be interesting to see is whether EISs will be extended. At present investors in an EIS enjoy 20 per cent tax relief on up to £500,000 of investment in an approved business that has less than 50 employees and gross assets of under £7 million. Many would like to see the relief extended to those people who provide loan funding to businesses, an increasingly popular source of capital since the banks have virtually closed their doors to business funding.

But what of Entrepreneur’s Relief, which of course was never as simple in practice as it first appeared when introduced? The report echoed the sentiments of business groups that it ought to be simplified and extended to those investors holding less than five per cent of the company, currently left out in the wilds having to fork out 18 per cent capital gains tax on sale of the company.

What we would really like to see, which would get serial entrepreneurs working again, is the removal of the £5 million lifetime limit of Entrepreneur’s Relief. This would be, in effect, a move back to the very conducive incentive of business taper relief, which ended almost exactly three years ago.

Update 23rd March, 2011: Entrepreneur’s Relief to double to £10 million

Entrepreneur’s relief increased to £2m

Wednesday, March 24th, 2010

The Chancellor has given some tax concessions to business in the form of business rates, increased investment reliefs for plant and machinery, and entrepreneur’s relief. Entrepreneur’s relief is the crucial one for people looking to sell their business. At present, if someone sells their business for up to £1m then, subject to certain criteria, they will only pay 10% capital gains tax (CGT) on the proceeds. This is a one-off relief, mainly aimed at long serving business owners who sell in order to fund their retirement. Given that the marginal rate of capital gains tax is 18%, this is a valuable relief.

In the budget today, Alistair Darling announced that entrepreneurial relief will be increased to £2m. This is welcome news for anyone who is looking to sell their business, especially if it is valued in the £1m-£2m range. However, given the pre-budget rumours surrounding the possible rise in the standard CGT rate and the perception that capital gains tax is really only paid by the wealthy CGT will be no doubt be looked at closely after the election. Of course, with the labour government’s love of stealth taxes we suspect that the devil will be in the detail of the legislation. It should be noted that the CGT allowance has been frozen at £10,100. The tax take from CGT is perhaps higher than was expected as asset prices have risen quite significantly in the last year.

It is completely free for owners of businesses to list their businesses for sale on our site. For more details on the conditions that need to be met in order to claim entrepreneur’s relief as well as a huge range of resources and advice on how to sell a business please subscribe to our monthly publication and daily updated website.

Exit strategies lacking among British businesses

Tuesday, January 12th, 2010

Nearly three-quarters of sole traders in the UK do not have a business exit strategy in place, while 2.6 million have not insured against the loss in profit or cost of replacing their "key person" against the worst. That's despite 77 per cent of sole traders who have a key person in their business admitting that their enterprise wouldn't survive the loss of that key person.

Research from the Scottish Widows Business Protection Report reveals that 73 per cent of sole traders don't have a business exit strategy in place because "they have not thought about it" or because they don't plan to intentionally leave the enterprise in the foreseeable future. A quarter of sole traders were further found to have no business protection insurance in place either.

Commenting on the report, Stephen Alambritis from the Federation of Small Businesses pointed to the swine flu outbreak as one "stark reminder" for firms about the importance of planning ahead to protect themselves from such threats.

"It is vital to consider how, if something like serious illness did strike, your business would continue to function; how you would meet your contractual obligations to clients and suppliers," he continued. "It's always better to have detailed plans in place now, rather than worrying about what to do when it's already too late."

Due Diligence Tips for 2010

Friday, January 8th, 2010

The importance of due diligence to the success of a transaction is often underestimated. We thought it might be useful to put together a few pointers to keep in mind while running a due diligence exercise on a business you are intending to buy. A more thorough explanation of what is required is available to subscribers.

Approach the whole process with a very objective and critical eye. When you have seen a business to buy it is very easy to get carried away and marvel at your own cleverness at seeing such a good opportunity. But always remember that it is much easier to evaluate what has been presented in a memorandum of sale than to spot what has been left out.

Get the right advisors

Buying a business is a team effort and the most important members of your team are your accountant and your solicitor. Make sure that you have a good working relationship with both and they are properly instructed. If you need to appoint new advisors do so on recommendations to ensure they have the appropriate skills.

Plan it, scope it

Define the scope of the due diligence exercise and clearly mark out who is doing what and when. Work to a timeline. In order to conduct a thorough investigation you must have everything in order before the due diligence process begins. In fact, you must start your due diligence preparation and information gathering the moment you decide that you are interested in a particular business. You will need the following:

An exact step-by-step plan of the entire due diligence exercise.
All of the information and relevant items you need from the seller before you start the analysis.
A checklist of… (more available to subscribers)

Employee issues

Thorough due diligence should pick up any issues, risks and potential liabilities relating to the seller’s employees. For instance, check if there are any past or present employees litigating against the business. Other important areas to look at might be the following.
Do any of the employment contracts have unusual clauses i.e. over-the-top redundancy packages?
What are the specifics of the pension plans?
What is the bonus structure and is it rewarding performance fairly?
(more available to subscribers)

Move fast, top down

It is important to spot any issues early on so that the appropriate warranties and indemnities can be quickly put in place. As these are legal documents, which are meant to protect both the buyer and seller from things going wrong, they can be complex, expensive and take time to put together. Focus on major issues first.

Communication is vital

The flow of communication between the buyer and his/her solicitors is of paramount importance, for if they do not work closely together, the process can quite simply fail. The buyers must communicate the key issues of concern to their solicitors; they should not just assume that all areas are of equal importance, and that everything will be dealt with in good time. Continually monitor the activity of the solicitors and accountants carrying out your diligence and make sure they are giving you regular feedback.

Don’t forget the culture

Funny how the lack of understanding of the target’s company culture is one of the main reasons for failed acquisitions, yet this has been notoriously ignored in the due diligence process. Don’t make the same mistake. This is usually one for the purchaser’s management to consider, rather than delegating to legal or financial advisers. Map out the management styles of your business and the target business. In the report we look more closely at the culture of a business.

Collect information, then analyse

Don’t let any of your advisers analyse whilst collecting the information. These are two distinct activities within the due diligence process. First find out where the required information is, then collect the information, recording its source and noting whether it is fact or hearsay. Then start an objective analysis.
Finally, make sure you differentiate between fact and opinion. Information that is presented as fact should be signed off by the target company’s directors.

Don’t panic, take your time

A focused but comprehensive approach is better than taking shortcuts in order to reduce costs. Often the buyer discovers that ‘thin areas’ of diligence need to be covered again in more detail, ultimately consuming extra time and costs.

In partnership with the Business Sale Report Smithfield Partners Solicitors and WM ProServ LLP, accountants are offering £5000 worth of free legal or accounting Due Diligence. What is the catch? This offer is only available to the first 5 companies that apply via the Business Sale Report. To qualify you just fill in our due diligence enquiry page.

We wish you luck in finding a great investment for 2010!

A note on preparing a business for sale

Monday, October 26th, 2009

So many business owners fail to achieve the asking price that they want, and the reason for this is there is often a mismatch between the owner’s expectations and the market’s estimations.

But the funny thing is, with a bit of pre-thought and preparation, the two disparate values can really come a lot closer. When preparing a business for sale it is vital that business owners add value to their company well in advance of the sale date.

This ‘window dressing’ can help business owners achieve the highest possible price for their business while also benefiting from any efficiencies put in place in the run up to the sale.

Adding value does not just mean cutting costs, it can actually involve increasing spending on elements that will make a firm a more attractive prospect for a buyer.

Capturing ‘quick wins’ is key to the value improvement process and business owners need to think strategically well in advance of the intended sell date in order to achieve these.

Once value has been optimised, sellers can move onto the next stage of preparing their business for sale, which involves getting their firm valued and marketing their company for sale.

If you are looking to get a realistic valuation for your business, asking for advice from an accountant or a solicitor will help you to choose the most appropriate valuation method.

And remember, in terms of marketing your business to potential buyers, listing the business in the Business Sale Report is a useful (and free!) place to start, as you can target serious buyers – saving you money and time.