There comes a time when most families seek to sell their business, whether it be five years after its creation or two hundred years.
The main reasons for the sale of a family business are usually retirement and/or lack of succession, but sometimes a strategic buyer makes an approach and the family is simply tempted to cash in. So, even if there is no immediate plan to sell, it’s usually in the family’s best interest to have the business in a sale-ready state at all times.
How the family operates the business has a major impact on its saleability and ultimately its value of sale.
Here, Natalie Wright, Head of Family Business at Mazars shares ten tips that will help achieve maximum value as well as a smoother process:
Keep your customer base as broad as you can. Concentration amongst only a few customers increases risk and damages value.
Consider your customers and customer relationships carefully and lock them in contractually. Long terms relationships with customers, enhanced further by forward visibility through contractual tie-in, gives buyers confidence that they will continue to buy from you. This adds to value. A churning customer base or a need to continually win new customers is a devaluing factor.
Ensure that there are others in the business that are involved in the key customer relationships and general activity within the business. A buyer will want to see a sustainable business that can continue to operate once the family exits. If not, they are likely to tie you to the business longer term and will want to pay for the business over time rather than in cash up front.
Lock your key people into the business. Whether you sell or not, these are of high value to you. Share schemes are a great way of doing this and incentivises the employee to help you grow the business. An EMI (Enterprise Management Incentive) share scheme is HMRC approved, is attractive to employees and is very tax efficient for the employee and the business.
Manage your working capital carefully. Too much cash tied up in stock and debtors can be unattractive to a buyer and seldom adds to value. Cash sat in the bank definitely adds to the value.
Take tax advice on the ownership structure of the business. Although rules changed recently, Entrepreneurs Relief still exists. Better to be taxed at 10% on the sale than 20% if you are able to. Leave it too late and you miss the opportunity. There is also pre-sale planning that may only be available to you if you action it before the transaction and where you have a sizeable legacy, it is important to protect it.
Ensure that you prepare good quality financial information at all times. A buyer will expect to see this. Make it easy for them and keep it updated.
Speak to others that have gone through a sale process to understand how the process worked for them and what they would have done differently with their business if they had the opportunity. It’s important to go into this with your eyes open and to maximise the opportunities and limit the risk.
Think through the cash needs for you and your family for the future – get a personal cashflow forecast. Can you afford to sell now? What price would you need to get for the business to make it work for you and is your business worth that? Knowing your number can help once you get into negotiations as you can have peace of mind in knowing what you need to meet all of your objectives.
Keep your premises clean and tidy. First impressions count. It is amazing what difference a coat of paint can make to the appeal of a business to a buyer.
So, even if a sale is not on your agenda right now, it pays to be ready and to know the options. The above are good business practices anyway and you never know when someone will come knocking on your door. It is usually when you least expect it.