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."

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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!

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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.

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Common logic dictates that it’s better to buy than to sell during a recession, when prices are low. That’s certainly the logic that prevails in the property market, but is it also true of selling a business?

Certainly it can be a challenge to sell a business and get the terms you want, but it can be done.

The first thing you should do if you want to sell your business during a recession is to demonstrate that your company can show profitability in the peaks AND troughs of the economic cycle.

You should also prepare a plan that you can show to prospective buyers, detailing the growth potential of the business.

Finally, you must be prepared to negotiate payment terms. It’s a lucky seller indeed who can persuade a buyer to part with 100% of the money upfront, especially in the current climate. It’s more realistic that a buyer will want to negotiate staged payments or even an earn-out period.

Vendor-financed deals are working very well in this climate, but if this is something you want to pursue you should definitely talk to a professional advisor about the best way to structure the deal.

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Recently, we have seen investors looking to get back into the property game. Countrywide, the estate agency group, is to begin the search for acquisitions after its investors strengthened its balance sheet with £37.5m following on from its recent debt restructuring. It was reported in the Sunday Telegraph that Countrywide has £75m ready money to purchase businesses. The company has grown primarily through acquisitions. The strategy will continue as the group takes on smaller troubled estate agents.
Private equity group Apollo Management bought Countrywide in May 2007.

Today, Nick Leslau, well-known property entrepreneur, is to buy up distressed property assets with his new investment company Max Property Group. The £200m new business is to be launched soon on the AIM market. Aubrey Adams, former chairman of Savills, is to be the chairman of the company. Mike Brown, former deputy chief executive of Helical Bar, is also to be an executive.

Adams said: “Difficult conditions in the UK property market present a compelling investment opportunity for those with sector experience and an in-depth understanding of long-term supply and demand issues.”
Max Property will consider investing in all types of property. Leslau aims to close Max Property after seven and a half years, spending five years to invest the fund and two and a half to wind it up.

So now is the time to buy property then. Mind you, any investing at the moment is not for the faint-hearted or the inexperienced. Nick Leslau and Countrywide certainly have bags of experience in this sector. The question is then who else is going to pile in?

UPDATE – 20/05/2009

Three big property investors have announced capital raising plans to fund acquisitions in the depressed property market. Big Yellow, the self-storage property company, has raised £33m through a placement of shares, Great Portland Estates has announced its intention to launch a £150m rights issue, and Shaftesbury has stated it is considering raising capital as well.

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Now that the ‘easy-credit’ party is over and businesses are facing uncertainty in the face of a faltering UK economy, there will likely be extraordinary opportunities for entrepreneurs to buy distressed businesses.

Recent figures released by the Insolvency Service reveal just how difficult the situation has become for some businesses. Between April and June this year, there were 3,560 liquidations, up 12 percent on the first three months of the year and a 15 percent increase on the second quarter last year. It also looks like the third quarter of this year will show a similar, if not higher, increase. Receiverships, often initiated by the high street banks and involving businesses that are at least three years old, have also more than doubled.

The Business Sale Report’s own figures show there were 2084 Administrative Appointments recorded throughout England and Wales in the first eight months of the year. This represents a 51% increase over the same period last year (1379). The industries most affected are property and construction. Other sectors suffering are those reliant on household discretionary spending including retail of white goods, furniture and leisure-based industries including travel, pubs and clubs.

Before venturing further, it is necessary to understand exactly what a distressed business is. The Insolvency Act 1986 (Section 123) sets out two primary forms of validation. The cashflow test. Where the business is unable to pay debts as they fall due; and the balance sheet test. The value of the business’ assets is less than its liabilities, taking into account its contingent liabilities and prospective liabilities. Obviously the degree of seriousness determines whether the business is liquidated or put into administration or receivership.

So why buy a distressed business?

Only buy a struggling business if you understand exactly why the business is currently in trouble, you know how to turn it around, and you have an exit strategy.

The one important myth to dispel is that the purchase of a troubled business is a bargain. The old adage that “if it looks too good to be true, it usually is” applies here.

Print film in a digital world�. many industries have a lifecycle that ultimately come to an end. If the product or service is no longer required at a level of need that enables you and your competitors to make a reasonable profit, why take on that struggling business and try to beat the odds?
Profitable investing in a distressed company is no different than investing in other types of business. It requires selecting a business, that once stabilised, has a demonstrable demand for its product or service going forward, for at least long enough to maximise your return on investment prior to or at your intended exit.
So you must do your research. Why is the business in trouble? Careful due diligence is absolutely critical in connection with a distressed business due to, amongst other things, the likelihood of limited or complete lack of recourse once the business has been bought.

So here are the important questions to ask:

• Is the business overburdened with debt?
• Are there any significant liabilities such as an adverse judgement or product liability claim?
• Are any tax losses available?
• Has the business lost key management?
• Are the company’s problems merely due to poor delivery or execution?

The ability to maintain the value of contracts going forward is essential. There may be restrictions on assigning contracts. Insolvency status may invalidate them and previous non-performance of contracts may incur penalties.

One of the main reasons that entrepreneurs buy businesses is the belief that they will be able to run the business better. So a buyer needs to be sure that they have what it takes to achieve this. The business may have been run poorly only because management time was taken up by a problem in the recent past so the current management are not incompetent, just distracted.

Of course, when buying a distressed business, ‘time is of the essence’, so it is important that you have a full team assembled so that you can go in and get all the information that is required quickly.
An entrepreneur has two possible methods of buying distressed businesses: either he or she can buy it to prevent it going officially insolvent, or else wait until the business is declared insolvent and buy it from the insolvency practitioner. There are advantages and disadvantages of both methods. We published an article on how to buy a business out of insolvency in the “September 2007″ edition, which you can access here. Here we will look at more general aspects of buying a troubled business.

How to find a distressed business.

A proportion of businesses up for sale are in some form of stress, as financial problems are often the catalyst that prompts the management to seek a sale. In addition to the listings here, you may consider contacting businesses via a trade association membership list, appropriate when a whole industry is in trouble i.e. estate agencies.
Specialist intermediaries are particularly useful if they also have considerable turnaround expertise. If you are known to them, you will usually be treated as an important buyer prospect, particularly if you have previously demonstrated the ability to act decisively and close a transaction in an efficient and timely manner.
Investors should be prepared to sift through many bad opportunities, and also accept that, for the good ones, there may well be a competitive bidding environment. If this happens, what, then, is the right price to bid? The “value” of a distressed company is often difficult to ascertain. The right price is going to be different for every bidder, because no two bidders:

• plan to run the business in the same way
• will effect a turnaround and stabilize the business in the same manner
• know how the business will integrate with the other businesses they hold.
• have the same cost of capital structure.
• have the same growth plans.
• share the same exit strategy.

In the current climate, where lending is drying up, the cost of capital is a key factor. Entrepreneurs who have large amounts of cash and do not wish to be highly leveraged are at a definite advantage at the moment.

So buying a distressed business can often have distinct advantages over alternatives. Start-ups always require more investment, in time and money, than is typically budgeted for. Moreover, there is often little or no track record of acceptability of the product or service. Profitable businesses have few reasons to sell other than to generate fast cash in excess of the net present value of the anticipated stream of the future cash. At the moment there are many owners of profitable businesses who are holding out for stretched multiples. So entrepreneurs who are keen to rapidly expand their portfolio of businesses interests would be advised to take a serious look at distressed businesses.
Another opportunity that cash rich entrepreneurs can exploit is the possibility that businesses might be divesting assets and divisions in order to improve their liquidity. According to Michael Garstka, a partner at Bain & Company, asset values are lower than they have been for a long time. “The downturn provides opportunities not just to acquire direct competitors, but also potentially key parts of your distribution networks or even choke points in your industry’s supplier chain.”

It is generally true that it is advantageous for the acquirer of a private company to purchase the assets not equity of the business for two main reasons – the tax advantages; and the fact that you will not be inheriting all the liabilities of the business. However, some assets still have liabilities attached to them such as contaminated land clean-up costs. Also, a purchaser may find him/herself exposed to intellectual property disputes on products. The entrepreneur will no doubt be under pressure from the seller to buy the entire company, but each situation is different and it is down to smart negotiation and good advice on structuring any deal.

In conclusion, if you have got what it takes to turn around a failing business, have cash in the bank or the ability to raise finance on good terms, then you are in a winning position. Cash is king. There are more failing businesses to choose from and fewer serious buyers in the market. This all leads to the prospect of rich pickings for a smart investor who is in a strong position in the market when the economy eventually picks up.

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So how did businesses take advantage of the 10% rate of capital gain tax payable on the selling of a business after the 5th April this year? Linda Bennett of LK Bennett shoes and the potato farmer behind Tyrells Crisps had a neat trick. They effectively “sold” their businesses to a trust otherwise known as warehousing. Capital gains tax rules judge the date of disposal as being when an unconditional contract is entered into, not when a deal is completed. The unconditional agreement was to sell the business to a trust contingent on finding a third party buyer. As such, this crystallised any gain so as to be liable for the 10% rate with a view to disposing of the business by the trust later in the year.

So what is the problem? The difficulty could come where the company that is warehoused is no longer able or willing to be sold. In this case the Inland Revenue may consider that you have sold a company to your trust and then effectively bought it back by tearing up the unconditional sale agreement. This would mean that you may face a large tax bill without the proceeds to pay it. Now that would be bad news.

The Inland revenue has always maintained that advance clearance or approval may be given to any sort of tax avoidance measure including company sales. As such it could be that if anyone had any doubts they should have consulted the revenue first. If the economy becomes more fragile and many potential sales fall through then entrepreneurs will also be out of pocket on stamp duty and legal fees.

However, it is unlikely that in practice the inland revenue would try and force this issue and demand payment of tax when no real benefit or proceeds have been realised. But the Inland revenue are not generally considered to be very generous so it is important to be vigilant.

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First there was retirement relief, then there was business asset taper relief, and now there is entrepreneurs’ relief. No doubt the next government will try something else! The latest relief has been introduced following the uproar from small business owners who felt that the proposed 18% CGT was an unfair tax levied when they sold their businesses to fund their retirement.

The new relief, available from April 6 2008 will be available in respect of gains made on the disposal of all or part of a business or on disposals of business assets.

The first �1 million of gains that qualify for relief will be charged to capital gains tax at an effective rate of 10 per cent. The �1 million is a cumulative lifetime relief and as such can be used on a single transaction or on a series of transactions. Gains in excess of �1 million will be charged at the normal 18 per cent rate. Of course, this is not so great for entrepreneurs who will buy and sell businesses through out their lifetime. So perhaps entrepreneurs’ relief is a bit of a misnomer.

As such, the new relief is a kind of resurrection of the old retirement relief, which was phased out between 1998 and 2003. The new rules, to be enacted on April 6, are simpler. There is no minimum age limit for entrepreneurs� relief (under retirement relief you generally had to be 50 plus to get relief). And in general, entrepreneurs� relief will be available where the relevant conditions are met for a period of one year, instead of the retirement relief qualifying period of up to ten years.

There will be no minimum age limit for the relief. In general the new relief will be available where the relevant conditions are met for a period of one year.

Where a business simply stops trading, rather than is sold, relief will be available on gains on assets formerly used in the business and disposed of within three years of the cessation of the business.

The rules are quite complex and in order to qualify for the relief there a number of conditions that need to be met. We do take a closer look at the draft legislation in our subscribers section of the report. If you are not already a subscriber then please join us and subscribe.

It should be noted that the final legislation has not been seen so there may be some small amendments. We will take a look at the legislation and if there are any relevant changes we will post them here on this blog.

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