Much has been written about all kinds of business related planning – from operational planning to planning for growth – but most owners of small businesses fail to make any plans for the one event that is inevitable and will happen to every single business.
As a result of not planning for this event business owners lose a large part of their wealth and, sadly, most of them do not even realise it.
The event, of course, is the eventual passing of the reins, the change in ownership of the business. Every business, if it’s not to die, eventually passes to new owners. There is no alternative. The new owners might be ones who’ve bought the business, or they might be the children of the business owner who inherited the business on his death. In either case, a lot of value and tax breaks (!) are lost if the event wasn’t planned sufficiently in advance.
Why Is Planning Important?
Let’s look briefly at, for example, the sale of a business.
When a business is sold, it’s a one-off opportunity for the business owner/s to benefit from a significant financial reward by releasing value built in the business. However, the value a business has at the point of sale is dependent, contrary to popular opinion, on not just the profit (or turnover!). In fact, less than 50% of value that a good business possesses at the point of sale comes from the financials. The remainder comes from the owner having put in place, years ago, attributes that may appear relatively minor and insignificant but which have an oversized influence on value / price!
We have recent examples of a business that was under offer for +£500K but which failed due diligence because the contract under which it had signed clients over the years contained a minor legal flaw (which didn’t impact operations, but impacted sale of the business). A certain term in the contract severely restricted any acquirer’s options with respect transferring clients; the business ended up selling for less than £200K. Had that been spotted a few years ago, and corrected, it would have been worth +£300K to the owners! Another business had failed to keep the right records – records that are not legally required but which buyers invariably demand – and this costed it over 30% of its value.
Similarly, using the “wrong” stock keeping software, not having a shareholder agreement and a myriad of other factors that do not impede the normal running of the business, can become major sticking points through the sale process thus preventing shareholders from getting full value. And without proper tax planning, again years in advance, many tax breaks can be lost! This includes the coveted Entrepreneurs Relief – a tax break that covers capital gains on the sale of a business.
Conclusion
Business owners often believe that when the time comes for them to move on they can put the business up for sale and successfully cash out at a good price. What they fail to appreciate is that if they do not plan for this event years in advance they are unlikely to be able to realise anywhere near full value for the business. And if a sale is forced, perhaps as a result of the owner’s ill health, or death, it’s usually the case that the business sells for little more than the value of stock! Value in the intangible assets such as goodwill, trademarks, licences and approvals and much else …is often simply lost.
It’s worth all business owners treating a business exit like they would a last will and testament. The exit will eventually happen, and the owner’s preparation, or lack of it, will determine the price the business fetches.
Where can business owners get early advice on maximising the likely value of the business at the point of sale? If it’s a business that has a large property element – freehold of shops, pubs, leisure centres, any other commercial property, there are specialist commercial real estate agents who are able to advise. For broader advice on exit planning it may be worth finding the right business broker as many provide growth advisory and exit planning assistance. One can find the right broker at this has a directory.
Best wishes for maximum value to your own exit whenever that happens.
