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What’s involved in selling my business?
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Introduction // Trevor Lake
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Routes to exit
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The right value for your business
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EOT: Summary and casestudy // Stuart Sheldrick
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Tax and reliefs
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Next steps and useful links
How can youmake wealth transfer work for you?
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Great things are not done by impulse, but by a series of small things brought together
In my experience, there is no such thing as a standard business succession plan. The very nature of handing over the reins of a company you have spent years, or even generations, building means there are a number of unique personal and business considerations which make each succession process very different. Whether you want to keep the business in the family, sell to someone in your industry, or introduce external investors, there is a range of important decisions to make that will determine the best choice for your future and that of the company. Firstly though, I believe the most important thing of all is to have a clear and adaptable strategy in place before any action is taken. This strategy will set out all aspects of the business and how they will be dealt with before, and during the succession. It should consider things such as the impact of valuing different areas of the company, the pros and cons of different types of sale, the tax implications and types of relief available, and, perhaps most importantly of all, how to communicate and engage with your staff, management, customers and connections on what the future holds for the business. In the current global climate, there are new, and previously unforeseen, challenges for businesses and I have seen many owners wanting to discuss succession for the first time as a result. With Government support for businesses changing to react to these events and industries adapting in different ways, it is crucial that business owners understand how succession might work in the future, rather than focus simply on how it might have worked before. This needs the right advice. In this guide, we will look at the most important areas to consider when creating your strategy, what options you have available and their financial implications, and how to get the most out of the support from your advisors whenmoving towards the sale itself. We’ll also let you know howwe can helpmake the process smoother and more effective for you and the company.
Trevor Lake // Director
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Succession planning is twofold, one is an emotional one - the desire to leave a legacy and one a financial one
//Routes to Exit
There are a number of paths you can take when considering the best route out of your business. Each comes with its own considerations – whether that’s the speed of the process, proceeds from the sale, opportunities for your family or management team, or your ‘parental instincts’ in ensuring the best for your staff and clients for the future.
Here we take a look at some of the main options available:
Natural Succession If your family members are already part of the business and, crucially, have the necessary skills to continue running the company after you leave, this may be the most desirable solution. Otherwise, you may want to involve willing family members ahead of your departure and arrange for the necessary training for them to take over the reins when the time is right. You can then decide whether to arrange a buyout with bank funding, in order to get the financial return you deserve for your years of dedication. Management Buy Out (MBO) If you have an existing management team, they may wish to acquire your shares in the business. If you feel your management team has the necessary experience and desire to continue the company in your absence, or you believe you could put a team in place which does, this could be a good path to take which would ensure continuity for your staff and clients. The management team already know your business and might face fewer hurdles in the take-over. Banks can be very supportive of these transitions. Employee Ownership Trusts (EOT) An alternative to an MBO is to look at a wider, EOT solution. Creating a trust, which would give a controlling stake to all employees, can be financially effective for both sides, and result in greater staff engagement and commitment regarding the future of the business. Trade Sale Should none of these options be available, there may be interest in your business fromwithin your sector, from competitors and complementary companies. A trade sale, through a structured merger, or acquisition, with another business connected to your industry, may be an option to consider for many.
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The goal of the process is not to make current management replaceable, but to secure the continuity and continued growth of an organisation
Private Equity or Venture Capitalist Sale For larger businesses, or those where there is an opportunity to scale up quickly, selling the company to a Private Equity (PE) company or Venture Capital (VC) firm may be attractive. In order to appeal to these buyers, the business would need a solid structure and an experienced management teamwhich has been instrumental in its success. Generally speaking, PE and VC companies will not run the business themselves, although in the last ten years, since the financial crisis, we have experience of a small number of PE firms which have actively run the business. Partial Sale If you want to either retain some benefits of ownership in your business after succeeding the everyday running of the company, or you are unable to secure a PE or VC deal which works for you and the ongoing future of your company, you might, instead, consider an initial, partial sale. This could relieve you of your responsibilities and allow you to return to the situation later to complete the sale when the time is right.
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Research shows that wealth creators can often be overly controlling, with more than two-thirds saying they are cautious about handing over management of the family wealth
//The right value for your business Once you’ve made the decision that you want to proceed with your succession plans, and you understand which routes may be available to you, it’s then important to focus on maximising the value of the business. Typically, businesses are valued using a balance sheet analysis, a cashflow forecast of future performance and an adjusted value of profitability based on the industry and size of the business. Getting the right support and advice in understanding what is included in these calculations is crucial so that you can start taking steps to improve the business’s value. To achieve this, it’s vital to have a plan in place which includes different aspects of the company – either to ensure an important box is ticked, agreements are secured, or to review and improve processes within the business. Here are some tips for what to include in your valuation strategy:
1. Ensure a high-quality management team is in place, not only to help achieve the aims and plans ahead of the sale, but to give you flexibility in exit routes available to you.
2. Ensure patents and trademarks are in place for all intellectual property you have created and used.
3. Make sure you have appropriate contracts in place with key customers and suppliers. This is especially important where only a handful of customers and suppliers are used.
4. Make sure you have a lease for your trading premises in place that extends beyond the sale date. This is vital for continuity of the business from the new owner’s point of view.
5. Ensure that key members of staff are tied to the business, especially where they have good relationships with key customers and suppliers. You may want to discuss share options and structures with your advisor at this stage. 6. Make sure that internal processes are as efficient as possible and well-documented. Check that financial information is readily available. This will help potential purchasers to more easily see, and have confidence in, how the business runs.
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Without a successful succession plan in play, you are building for a future that has no future
7. Look at whether investing in new technology, or in improving parts of the business now, could pay dividends by making the business more valuable and sought after further down the line.
8. Consider whether acquiring another business would be of benefit. This may be to capture new and valuable customers, to achieve growth goals or to introduce key staff and management needed for a more successful future of the business after your exit. The most important point throughout is to ensure you have the right advice for undertaking some of these actions. Then, when you feel you are ready to begin the process, consider carrying out a pre-sale, due diligence exercise. Your advisors will then review the business’s position and make recommendations on how to present the company in order to achieve as much value as possible, as well as whether it is ready for sale. The process of selling a business can be costly, so selling at the right time and at the right position is key. By using these tips as part of your strategy, you should be more confident that you are maximising your exit opportunity.
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Train people well enough so they can leave. Treat themwell enough so they don’t want to.
EOT: Summary and case study When business owners, particularly those of smaller companies, are thinking about succession plans, they will inevitably look to their family, or senior management, for internal take-overs. Otherwise, they may feel they have to put the business up for sale instead. But there is another way. Sometimes referred to anecdotally as the ‘John Lewis Model’, an Employee Ownership Trust (EOT) provides a route out of the business for owners and an incentivised future for staff who now have the opportunity of a stake in the company for which they work. By creating a trust to be run by all employees, the business has a natural succession and avoids many of the issues and risks which come from selling to external parties. It also encourages greater loyalty and engagement from staff, who can now have a say in the future running of the company. This has been proven to often increase innovation and performance through having a mutual benefit for all. There are tax benefits too, as setting up an EOT allows business owners to exit without any capital gains tax to consider. It also provides options of bonuses for staff through their share options, rather than through their salary. For any owners considering this route, the first step is to ensure you have the right advisors on board, ahead of time. Due to the nature of the trust arrangement and the tax implications, EOTs require a lot of planning at the beginning. A range of qualifying criteria needs to be met along the way, which requires professional support. Although EOTs were once only considered for much larger companies, there are some advisors, such as ourselves, who have the expertise to set up and manage trusts for a range of different companies. The value comes from having advisors with the right insight, not only to identify whether this is a possible route to take, but also, to manage through the process and advise the trust in the aftermath of the handover.
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Don’t simply retire from something; have something to retire to
We recently worked with a local business which had never considered EOT as an option before. Here’s their story:
“The client, an established, regional recruitment agency, were intending to exit their business with family members taking over the reins of the company as part of a natural succession plan. However, due to a change in these circumstances, coupled with changes within the industry, this exit strategy was no longer viable – so they asked for our advice on alternatives. “After reviewing and discussing the options of exiting the business, we raised the idea of using an EOT. The merits of this approach for the client were that it enabled them to reward loyal and key staff, reduce their overall tax exposure, and have a readymade purchaser of the business - making the sale process quicker than a trade sale would have been. For staff, it meant they would have greater control of the direction of the company, and removed any risks to their jobs and career prospects which may have come from a sale to another business. “A detailed review was undertaken to ensure this approach was right for the business, the staff and the owners and that the company met the necessary qualifying criteria to proceed. Then, working alongside the client’s legal advisors, we took the owners through the whole process, step-by-step, so they had a clear understanding of each stage, as well as the benefits and obligations along the way. “As a result of what turned out to be a smooth process to create trust and communicate what was happening to all those involved, the owners were able to exit the business tax efficiently, in the knowledge that the company would continue in the safe hands of their staff. We now support the new trust with its ongoing management and financial commitments and already see a bright future for the business.”
Stuart Sheldrick // Director
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A leaders lasting value is measured by succession
Tax and reliefs When it comes to the financial side of selling your business, there are many things you need to understand: it won’t just be the sale proceeds you need to consider, but also, any tax implications from the route you choose to take. If you are planning to pass on the business to family members, including your children, to run after you leave, youwill largely be free from inheritance tax through the Business Property Relief youwill have built up. However, if your family will not be taking over the business and you need to sell to another party, your sale proceeds could have significant inheritance tax implications, particularly, if you are selling due to retirement or poor health. In this case, you should always discuss your options with your advisor, as there are ways in which you can mitigate capital gains and inheritance taxes by using some efficient investment methods with the sale proceeds. You should also consider Entrepreneurs’ Relief and the recent changes to it, before committing to any sale of the company. When selling shares, this relief allows for a 10% tax rate to be applied, reducing the amount of capital gains tax that you would otherwise be faced with. Importantly though, earlier this year, the lifetime allowance for Entrepreneurs’ Relief was reduced from £10 million to just £1 million, meaning owners of smaller companies are now at risk of exceeding the limit. Again, creating a strategy in advance and gaining the right advice are crucial when considering any qualifying criteria and the impact of different types of sale. On the upside, there is another solution which some companies use andmany more should consider – the Enterprise Management Incentive (EMI). This method is especially useful for companies looking to incentivise and retain their key talent, as any outlay you spend on setting up and running an EMI scheme is likely to be far less than the sizeable recruitment and job advertising fees needed for replacement staff. Under an EMI arrangement, key staff can be given share options without tax implications at the point of issue, giving relief to both the company and the employee. Upon sale of the shares, the proceeds then qualify for the lower 10% Entrepreneurial Relief rate, and bypass the usual 5% company ownership needed to qualify for this rate. There really are no downsides to setting up an EMI scheme if your intention is to move towards handing over your control of the business. They are a great way to reward loyalty among your staff and keep those vital employees who will be needed for the success of the company after your exit. If you think this could work for you, your advisors can look into your eligibility as not all industries qualify. They can then advise about taking your first steps.
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Planning is bringing the future into the present so that you can do something about it now
At LB, we commit to providing the same level of skill, experience and expertise to businesses of all sizes, giving them opportunities to find the most appropriate solution for their specific needs. We understand the personal investment and emotional commitment of owners to their businesses and aim to support them across their whole journey, from start-up, right through to exit. Our team of experts value honesty and integrity: the cornerstones of the work we do. We work together with our clients, not simply for them, across a range of advisory areas which build the whole picture of their business. By creating lasting strategies where innovative thinking and expertise can thrive, we aim to help secure the long-term and prosperous future of our clients and their companies. If you have started to think about exiting your business, or would like to discuss what to put in place for the future, our teamof specialist advisors would be happy to talk to you about anything you need to know. Alternatively, if you’re thinking of purchasing a business, our team can ensure you have the right expert to help you through the succession.
You can also attend our monthly webinar, which gives some real insight and guidance to businesses on a range of key topics. To see the next themes we’ll be covering, visit our website at this link.
In addition, you can get some further support for your new business by visiting some of the following:
Federation of Small Businesses https://www.fsb.org.uk/
Small Business https://smallbusiness.co.uk/
Mind Tools https://www.mindtools.com/pages/article/newtmm_70.htm
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// lbcorporatefinance.com
// lb-fs.com
// lb-ms.com
// lbinsolvency.co.uk
// lbrecruit.uk
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