Company sales – are you sure of the price you are getting?
10th April 2018 by Simon Martin
It has not been an easy decision, you have agonised over whether this is the right time to sell the business which you have been building up for years, but you have accepted an offer.
The Buyer is credible, they have a good reputation and will look after the staff and the brand, and the offer was too good to refuse. Or was it? It is important for any prospective seller to realise that the headline price in bold on the offer document is not necessarily the cash which will be received for parting with the company.
The offer format in every deal will have its own intricacies which are specific to the Company under offer, however there are many similarities from deal to deal.
What is the offer for?
The main question here is whether the offer is for the shares or the assets and trade of the Company. Once this is decided there will still be uncertainties.
An offer for a profitable company which is not heavily land backed will usually be made at an Enterprise valuation level. There are two main levels of valuation – Enterprise and Equity. An Enterprise valuation considers the trading value of the business through analysing its underlying profitability. The Equity value takes the Enterprise value a step further by considering the balance sheet. The most common adjustment here is to add on the cash which is not required as working capital and deduct any debt. It is important to realise that debt will not be everything which the company owes. It is typically structured debt such as bank loans and hire purchase, although the exact definition of debt will be a point of negotiation and included within the legal contracts.
Compared to many assets a Company is very fluid. It is a near certainty that the net assets of the entity when the offer is made will not be the same by the completion date. To guard against this the buyer is likely to want to include mechanisms to adjust the price if the shape of the balance sheet or the performance of the Company noticeably changes. Target ‘pins’ relating to net asset position, cash and working capital are not unusual.
Will it all be received upfront?
An element of deferred or contingent consideration/earn out is fairly standard. It is important to realise the difference between these two options. Deferred consideration will usually be a set amount to be paid over a specified period at an agreed rate – similar to a loan. Contingent consideration will mean that at least some of your future payments are linked to the performance of the Company. If this is the case then careful consideration must be given as to whether you are still in a position to contribute to the performance of the Company to ensure that the targets are achieved. It is possible that this mechanism could also include a ‘reverse ratchet’ which could actually require you to repay some of the consideration received at completion if performance falls below a set level.
Will tax be included?
As you will receive funds from the sale of your company there is one deduction which is likely to be unavoidable – tax! The personal tax charge will fall outside of the deal but is still an important consideration to factor in, especially if you have a walk away amount which is required to fund other ventures in life. The percentage of tax payable can vary vastly depending on the characteristics of your shareholding. If you are thinking of selling in the near future then the availability of entrepreneurs relief should be looked into as soon as possible.
Companies have many moving parts compared to an asset such as a house, therefore it follows that in the majority of transactions, calculating the consideration will not be as easy as fixing on one number. If you are contemplating a sale or are already in negotiations and would like advice on how to structure your deal, the Ensors Corporate Finance team will be pleased to help.
« Back to blog