how to sell your business - baker tilly 050907
DESCRIPTION
How to sell your business, expert advice on valuing your business and how, when, who to sell you business to.TRANSCRIPT
Simon MacGovern
Realising the value of your business
Baker Tilly
• A leading professional services firm• Client base from OMB to PLC• Ranked 7th in the UK by fee income• 260 partners, almost 2,000 staff across 28 UK offices• A strong regional network with major offices in all key cities
throughout the UK• Represented internationally through our membership of
Baker Tilly International – 8th largest international alliance of accountancy firms
• Core services are: Audit, Corporate Finance, Restructuring & Recovery and Tax.
WHERE IS THE VALUE?
Theoretical Value
Multiple of turnoverMultiple of earnings
EBITEBITDAP/E
Net AssetsDiscounted cash flowIndustry-specific measures
Worked Example (1)
ABC LimitedTurnover £15mEarnings before interest and tax £1mLong term debt £250,000Surplus cash £500,000
Illustrative EV/EBIT multiple 6x
Enterprise Value: 6 x £1m = £6mPlus cash +£500,000Less debt -£250,000Equity value £6.25m
Worked Example (2)
ABC LimitedTurnover £15mEarnings before interest and tax £1mLong term debt £250,000Surplus cash £500,000
Illustrative turnover/EBIT multiple 0.5x
Enterprise Value: 0.5 x £15m = £7.5mPlus cash +£500,000Less debt -£250,000Equity value £7.75m
Valuation (continued)
So why the difference?£6.25m vs. £7.75m
Value depends on your perspective…
Example (1): Standalone investment?Example (2): Bolt-on to existing business?
Valuation (continued)
“The true value of a business is what someone is prepared to pay for it”
What actually drives value?
Profit? Yes, but also…
Customer baseChannels to marketIntellectual property/know-howKey individualsReputationThe right place at the right time
Case study
Specialist design/manufacturing company
Turnover £1.8mEmployees 6Historic net assets £19k
Price paid £7-9m
Why?
Case study (1)
Significant strategic value to the eventual buyer (based in Australia). For them the business provides…
Access to a rapidly growing segment of the marketClient base in a particularly affluent industryMarket leading productsProtected by key IP assetsUniquely talented management (design expertise)
Valuation - conclusion
Theoretical valuation is interesting, but may have limited meaning in a ‘real’ transaction situation.
The key to the value of a business lies in its value drivers. Realising this value depends on how the business is sold, when and to whom…
WHEN TO SELL?WHEN TO PREPARE?
(There is a difference!)
Timing of sale
Timing can be driven by any number of factors…
Personal motivation (retirement, ill-health, financial needs, diminishing fulfilment)Condition of the overall marketFinancial performance of your businessLevel of transactional activity in your industry
Timing of sale – market conditions
Market confidenceStock market levelsInterest ratesAvailability of debt / equity funding
Timing of sale – business performance
Can price expectations be met?SeasonalityWorking capital positionNew contracts about to be secured?When is your year end?
Timing of sale – deal activity
Is your industry flavour of the month?Appetite from Venture Capital, for example, can drive pricing upwards – herd mentalityIs your industry consolidating?Is regulatory change driving deal activity?
Timing – Preparation
The key to getting your business to market in the right condition and at the right time is early preparation
Adequate time for groomingTax planningMarket testing/researchEngaging appropriate advisersFuture plans?
In some cases this may need to start several years in advance of the final transaction
WHO WILL BUY?
Buyers
Broad categories of buyer include:
CorporateTrade buyersStrategic buyers
FinancialMBO / MBIInstitutional
Buyers
The most suitable type of buyer will depend the circumstances…
MBO can work if there is a willing (and capable) management team and if funding can be sourced
A strategic buyer may provide a greater chance of achieving a premium price
CONCLUSION
Conclusion
Consider your route to exit well in advance
This will allow you to:Prepare the business for saleGet the timing rightUnderstand what drives the valueIdentify who will buy the business…
Thereby maximising value
The tax implications of selling your business
John Kingsley
Taper Relief
• 10% CGT is the “holy grail”
• Trading company
• Unlisted or officer/employee or 5% of votes
• Non-trading company
• Officer/employee and <10% votes
• 75% taper relief after two years
• Rules changed on 6 April 2000
• Don’t assume: check your status!
The Charge to Tax on Sale
• But is CGT the only tax payable?
• Some specific sale circumstances can lead to some or all of the sale proceeds being charged to income tax.
• Anti-avoidance provisions
• Always seek HM Revenue & Customs clearance(s)
Consideration for the Sale
• Many different forms:
• Immediate payment
• Payment in instalments – no deduction for delay
• Contingencies – no allowance
• Unascertainable – but still has to be valued
• Earn-outs – no different from above
• Try to avoid receiving deferred consideration payable in cash
• Tax liability on value not yet received
Consideration for the Sale
• Paper for paper exchanges
• No immediate tax liability
• Swap shares for shares
• New holding treated as acquired on the same date and at the same value as the original holding
• Swap shares for loan notes
• Must be held for at least six months
• Are they qualifying corporate bonds?
CGT More Than 10%?
• Shares owned less than two years?
• Swap shares for shares or non-QCBs
• Shares became business assets in 2000?
• Time-apportionment of gain• Cannot ever get down to 10%
• Cannot reset clock by passing to spouse or trust
• Shares not business assets?
• Currently 30% CGT, minimum 24% after 2007
• Pre-sale dividend?
CGT Less Than 10%?
• Many planning arrangements no longer available, but bespoke planning might be possible
• Generally can still use:
• Payments to pension scheme
• Non-resident planning• NR for more than 5 years
• NR for less in suitable country using DTA
• Offshore trusts for non-doms
• Planning required, well in advance
QUESTIONS?