Tag Archives: business exit

How to add value to your business prior to sale

business-value_increaseIn a previous blog, I covered business valuation methods  to answer the frequent question from business owners, "how much is my business worth?"

MDs looking to sell their company often follow that question with another -

"How can I add value to my business before I start to attract potential buyers and 'put it on the market'?"

Take a few minutes to discover key ways you can affect your business value. Plus immediate actions you can take now!

Improve your Business Value

Using the profit based valuation model (see business valuation blog) as a framework, there are three areas to work on to improve your business value:

1. Increase the quantity of profits.
Most business owners are already well aware of the things they need to do to increase the net profit or EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) of their business.

Strategies might include:

  • grow the revenue (add new clients; new markets; new products; or just increase prices)
  • improve the gross margin (automate systems; outsource some delivery tasks; become more efficient; renegotiate supplier deals; realise economies of scale in a growing business; focus on higher margin products/services and/or clients)
  • cut fixed costs (outsource back office functions; move to a lower rent/lower salary location; review marketing spend, maintenance, entertaining, etc.).

2. Improve the quality of profits.
Not all profit is equal in the eyes of a buyer. They will generally pay more for a business that has better quality profits. Better quality profits will mean a better multiple in the valuation model.

Strategies for a higher multiple include:

  • having as much revenue as possible from long term client agreements
  • ensuring that no one client represents more than 10% of revenue or profit
  • not being dependent upon any individual employees (especially owner-managers)
  • systemising business processes (marketing, sales, delivery and finance)
  • owning and protecting Intellectual Property (patents, operating manuals, training materials, brochures, etc.)
  • growing the business to a significant size (a 1 or 2 person business is unlikely to achieve a multiple above 2, whereas a larger business could well achieve a multiple of 6+).

3. Improve the cash position.
Improving the cash position is probably the hardest of the three to influence and could in some cases be detrimental to value in other ways e.g. giving a discount for early payment helps to increase cash, but will also reduce the profit which may have a greater (negative) effect on valuation.

Strategies for increasing cash/decreasing debt include:

  • strict management of credit control. If clients usually pay 15 days late, the buyer may demand that more cash is left in the business to cover the reality of 45 days credit rather than the contractually agreed 30 days
  • agree (and take) the longest possible credit terms from suppliers
  • getting sales paid up front rather than giving credit.

Six additional ways to increase the sale value of your business:

  1. Sell to a trade buyer, rather than a financial buyer. The business may well be worth more to a trade buyer who can realise synergies, cross-sell to both sets of clients, etc.
  2. Plan for big growth. Your business may be held back by a lack of resources that a buyer could introduce. Produce a plan to show how the business could grow significantly with access to those resources.
  3. Get at least 2 buyers interested. A single buyer may drag out the sales process and chip away at the original, conditional, offer price. Some competition will generally speed up the process and bolster the final price.
  4. Tie in key employees. Use a bonus structure to ensure that the key employees remain with the business until at least 6 months after the sale.
  5. Use a specialist broker who knows your market and has access to buyers within that market.
  6. Sell the business at the right time in the economic cycle.

What you can do now to influence your business sale price

Whilst the true value of a business is only known when a willing buyer and a willing seller agree a deal, there are lots of things that a business owner can influence in order to improve the (theoretical) value of their business.

If a sale is being considered the owner should start thinking about all of the above as early as possible (up to 3 years before the sale) so that value can be optimised. Even if a sale is not currently being considered, getting a valuation and reviewing progress on an annual basis is good practice.

If you would like your business valued, with or without a sale in mind, contact Michael Cartwright who can put you touch with a FinanceHead who’s right for you and your business.

Andy Cristin
FinanceHeads Member

Project Exit: Planning your business exit strategy

Business Exit StrategyThe best time to start planning your business exit is the day you start your company.  If that is not possible then a planning horizon of at least 1-5 years but the longer the better.

This will give you the time to groom your business to show its best face, maximise buyer interest and take advantage of valuable tax planning opportunities.  In addition, a clear exit plan gives you a framework to guide decision-making and helps develop a coherent strategy for building your business.

Some entrepreneurs want to sell their business during their lifetime, taking advantage of the generous tax rate of 10% under Entrepreneurs Relief.  This may leave them cash rich, but Inheritance Tax (IHT) planning is advisable together with considering the funding of long-term care when elderly.  For those that want to retain a business to pass to the next generation, planning for IHT and checking the availability of Business Property Relief would be wise.

However, where the plan is to pass the business down to the next generation, there will be a need to consider IHT.

Inheritance Tax is a tax at 40% on estates above the nil rate band of £325,000 on death.  Your estate for IHT purposes will include a valuation of your company shares/business interests on death for tax purposes, together with certain gifts made within 7 years of death.

However, for entrepreneurs, there is a valuable Business Property Relief (BPR) of 100% or 50% against the valuation of relevant business property, which reduces the chargeable estate.

Business property qualifying for the 100% relief rate includes:

  • A trading business, i.e. a sole trader or a partnership
  • Shares in an unquoted trading company, including shares listed on AIM

This relief covers family companies.  There are various conditions which pose traps for the unwary, including;

  • It must be a trading business or company rather than one whose business is the holding of investments or dealing in securities
  • The business or shares must have been owned for two years before death
  • A business with excessive cash balances or other assets not fully deployed or necessary in the business, will also not qualify

Business property qualifying for the 50% relief rate includes:

  • Shares or securities giving more than 50% of the voting rights of a quoted company
  • Land, buildings, plant and machinery which was used for the purposes of a business carried on by a company of which the deceased then had control or by a partnership of which they were a partner
  • Land, buildings, plant and machinery which, was used for the purposes of a business carried on by the transferor and was settled property in which he had a beneficial interest

Key takeaway: don't assume that your business will qualify for BPR.

Seven Common BPR Pitfalls

Many entrepreneurs are aware of BPR, but are ignorant of the many pitfalls, meaning their IHT bill may be significantly higher than they have planned for when it comes to their business exit. The seven most common BPR pitfalls are set out below.

1. Is it a qualifying “business”?

A business or company will not qualify automatically if it includes elements of:

  • Dealing in stocks and shares, or
  • Dealing in land or buildings, or
  • Making and holding investments

The legislation does not directly refer to the situation where some of these activities may be present in an otherwise qualifying business or company.  The legislation refers to “wholly or mainly”, which is usually understood to be more than half.  In practice, HMRC’s interpretation will turn on the facts and the writer has seen them argue that more than 20% is the tipping point, so expert advice is essential.

For example, a business investing or dealing in property would not qualify for BPR, but confusingly, a property development business would. The difference being the act of development, rather than just buying and selling.

This lack of clarity presents a planning opportunity.  For instance, if a trading company owns an investment property, then in some circumstances 100% BPR will be available on the whole value of the shares in the company.  However, if the investment property is owned outside the company, no BPR would be available.

2. Are there any “Excepted Assets?”

BPR is not available on the value of certain assets owned by a business but not essential to the business.

Excepted assets often include:

  • Property partially used by the business and partially let to other occupiers
  • Assets used mainly for the benefit of the business owner or his family such as a holiday home
  • Cash balances surplus to those needed for trading. However, if the excess is say, part of a sinking fund for future investment or replacement, or can otherwise be shown, as needed for some future business use then BPR will be available.  Expert advice is essential.

3. Directors loan accounts

Directors’ loan account credit balances, also can be a trap for the unwary.  Typically, when the company has borrowed money from a director shareholder, or where a business and its goodwill is transferred to the owner’s company, creating a large credit balance in favour of the owner.

This is often to allow the extraction of cash from the company without suffering income tax.  The problem here is that the director shareholder’s estate includes this balance as an asset.  However, it is not one that normally qualifies for BPR.  Where the balance has little likelihood of repayment, it might be worth considering converting the loan to shares, which would qualify for BPR.

4. Resolutions to wind up a company

A resolution to wind up the company, before death will prevent BPR applying, unless they are part of an insolvency procedure to allow the business of the company to carry on post restructuring.

5. Binding contracts for sale

Property that would otherwise qualify for BPR does not qualify if it is subject to an unconditional contract for sale at the time of the owner's death.

6. Shareholder agreements

Shareholder’s agreements or partnership agreements often provide for surviving shareholders or partners to take over the deceased’s interest in the business.  These “double-option” or “cross-option” type arrangements need checking.  Properly drafted, they should form a “binding contract” for the deceased’s share to be sold to the survivors, which allows BPR to apply.  However, the writer has seen some poorly drafted ones where BPR would be lost.  Your lawyer can give advice on this.

7.  Property owned outside the business

It is common in family companies to find key business assets owned outside the business.  Often the shareholder personally owns the business premises or the intellectual property rights and receives a rent for their use.

There are good risk avoidance and tax planning reasons for this type of structure, but the applicability of BPR is often forgotten.  Because the assets are owned outside the business the BPR rate is 50% rather than 100%.  However, that only applies if the owner of the property had a controlling interest in the business or company.  If there is only a 50% partnership share or shareholding, this does not give control and no BPR is available on those outside assets.

Top tip: make sure there is a casting vote in the partnership agreement or in the company’s articles for shareholders, as case law has confirmed that this does confer a controlling interest and will preserve the BPR!

BPR is an extremely valuable tax relief for family businesses, but don’t just assume it applies, get advice from an experienced FinanceHead. For guidance in selecting the right FinanceHead for such a job please contact Michael Cartwright.

Paul Teasdale
FinanceHeads Member


N.B. These are general guidelines, always take advice from an expert before proceeding.