When looking at your long term goals, which may include your retirement and exit planning, if you own a business it is always worth keeping one eye on the “end game” and what value it might have should you choose to sell it one day. Business planning doesn’t have to just include growth and expansion. Eventually you may wish to sell your business and you will want the maximum return. It is often the case that business owners simply do not look that far ahead and, when the decision to sell is made, is the business sale-ready?
A little bit of investment in the years before the event will pay off when the sale process commences.
Having a pre-sale report and evaluation on your business is a worthwhile exercise. The report will give you guidance on what a buyer would be seeking and evaluate your own internal infrastructure, policies, financial information and procedures to assess the key issues that affect both the valuation and desirability of your business. It will also look at how well your internal systems run to make the whole due diligence process easier for you. Some subtle changes to the way you run your business and your record keeping can mean achieving a better net return on exit.
One of the key matters for most businesses is their management infrastructure. A lack of investment in senior management is the biggest barrier to selling a business. After all, what is there to buy if the business is “you” and “you” want to exit? The contracts you have in place with staff and clients also give a degree of certainty to a potential purchaser so should be robust. These are all areas that will be reviewed and assessed for strengths and weaknesses to support an offer made for the business.
We mustn’t forget that the value of a business is generally linked to the amount of profit it makes so it goes without saying that you need to time your exit from the business well. You should avoid making short term decisions in the run up to a sale which could materially reduce profits as the effect on valuation will be multiplied.
Starting early also means we can look at ways to make your exit tax efficient. Currently most business sales are subject to capital gains tax at an effective rate of 10% through Entrepreneurs Relief but there are traps that you can fall into. There are also ways you can maximise the effectiveness of this given enough time to plan. The amount of tax you pay shouldn’t be forgotten as it is the net proceeds in your pocket that matter once a sale has completed.
The upside to planning early for your exit is that it will not only make your internal process slightly easier but will also assist you in potentially making the business more profitable and, by making it sale-ready, a purchaser will be willing to pay more for your business.