In previous articles, we have examined various aspects of succession planning, with particular focus on the associated tax considerations. In this article, we turn to the strategic issues involved in preparing for the sale of an entrepreneurial business.
Many business owners hold a firm view of their company’s value; however, it is often unclear whether that expectation is realistic. Others readily acknowledge that they have little understanding of the likely valuation and may be uncertain about how to determine an appropriate figure or even a reasonable valuation range.
A detailed analysis of valuation methodologies for different types of businesses falls outside the scope of this short article. Nevertheless, forming an initial view of value will typically require a careful assessment of the strategic outlook for the relevant sector, the position of the company within it, and the business’s specific strengths and weaknesses. Key questions include: What profit or revenue multiples are being achieved by genuinely comparable businesses? Who are the most likely purchasers—competitors, consolidators, private equity investors, or existing management—and what are their particular objectives or constraints? For example, a competitor who anticipates synergies and value‑enhancement opportunities may be willing to pay a higher price than a management team whose ability to raise funding is more limited.
Employee Ownership Trusts (EOTs) have grown significantly in popularity in recent years. Determining whether an EOT represents an appropriate ownership structure is an important consideration. While the tax advantages—previously including full exemption from capital gains tax—have been reduced, with only half of the gain now exempt, an EOT may still provide a suitable exit route for businesses with the right culture and could represent a stable long‑term ownership model.
A realistic appraisal is essential throughout this process. Irrespective of headline financial performance, a business that is heavily dependent on a management team planning to exit, offers a product range being overtaken by competitors, or relies excessively on a small number of customers may find that anticipated profit multiples are less robust. Achieving the desired price may require a longer-term commitment from the sellers or involve an “earn‑out” mechanism, both of which introduce uncertainty regarding whether the headline valuation will ultimately be realised.
Maximising the exit price and identifying a purchaser willing to pay it often requires a significant period of preparation, sometimes spanning several months or even years. Measures may need to be taken to retain key members of management, possibly through equity‑based incentives. Such arrangements can both motivate individuals to enhance the eventual sale price and help secure the continuity of the leadership team. Consideration may also need to be given to the business’s ownership structure and the treatment of surplus assets.
Foundational matters relating to financial or operational systems and procedures may also need review to ensure they are fit for purpose and will not hinder the due diligence process.
Engaging an appropriate advisory team is often critical to the success of this type of strategic planning. Skilled advisers can assist management and owners in identifying the key issues, developing an appropriate plan, and maintaining focus over an extended period. Achieving a successful outcome typically requires a significant investment of time and a deep understanding of the business and the owners’ objectives. The best results are often achieved through collaboration between trusted long‑term advisers and specialist corporate finance and legal professionals.
This article was written by Kirk Newsholme Corporate Tax Consultant, Jim Meakin and Audit RI, David Stansfield, offering a holistic, joined up approach to the firm’s advisory services. For further advice over anything covered in these articles, please contact Jim or David.
Our next KN BB&C network event on Tuesday 21st April will continue the theme of business succession. If you are interested in hearing more on this subject from our specialist advisors to help with future business planning, you can find full details here: KN BB&C Event
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