There comes a time with any business, large or small, when the owners decide they want to move on and sell their business. There can be many reasons for this, often it’s because they want to retire or maybe because they have just had enough and want to reap the benefits by selling on the business. There’s a well worn path to follow when selling a business, a process Tax Agility has been part of with businesses in the Richmond, Putney and surrounding London areas. However, as the saying goes “the devil is in the detail”. Key aspects of any business sale need to be carefully prepared so as to provide a fair representation of the business’s health and outlook that can be presented to prospective buyers.

This article takes a look at some of the specific areas that Tax Agility pays close attention to when supporting the sale and how we can help businesses create a package of information ready for presentation to a prospective buyer. We can even assist with the presentation of the material in a professional manner too.

What’s my business actually worth?

selling your business in 2022Quite understandably, a business owner’s first thought and maybe that which prompted thoughts of selling in the first place, comes down to their perceived value of the business. Emotions can run a little high and lead to over optimistic expectations, especially with smaller businesses. This is why it is important to have professionals on hand who can review your business’s operating position and provide a fair view on market value.

The process of valuing a business is multifaceted. There are simple ‘rule-of-thumb’ guides that can help you. Often though, these are only suited to companies that have an established track record. One in particular is P/E (price/earnings ratio), or multiples of profit or EBITDA to arrive at an enterprise value. The multiple used depends on the market conditions and desirability of the sector the business is in. The other simple way to value a business is simply to assess its ‘assets minus liabilities’.

However, these are just snapshots of the business and don’t take into consideration a host of other factors, such as the business’s prospects going forward, or what the current owners plan to leave in the business, such as cash and other assets. Plus, of course, sellers have a number of ways in which they can make a business look more attractive than it actually is. An example here would be the timing of the sale where seasonal cash flow variations in working capital can influence the value of the business on first glance.

Areas where Tax Agility can assist

To present as fair a view as possible of the business’s financial operating position, it’s important to establish some baselines – or ‘normalisations’. These are essentially financial views that try and iron out variations that could cause significant shifts in aspects such as working capital.

In assisting the business sale process, we focus on:

  • Acting for vendors and purchasers of businesses.
  • Reviewing your business records to ensure they are in the best possible shape for due diligence by the buyer.
  • Assistance with the drafting of normalised earnings schedules to determine your true underlying earnings on which to base the valuation.
  • Assistance with the drafting of net debt schedules, which are required in cash free, debt free valuations of businesses.
  • Assistance with the drafting of normalised working capital. This is necessary to ensure the valuation is accurate and that there is sufficient cash headroom in the business.
  • Management accounts while the business is being sold. Monthly management accounts may be required to give potential suitors crystal clear visibility, affording them the confidence in presenting their bids.
  • Although we are not solicitors we will review the legal mechanisms in sale and purchase agreements and the accounting representations and warranties, which should be reviewed by a suitably skilled accountant.
  • We explain to vendors the different ways a company can be sold and the underlying tax implications of each. This includes a sale of the shares of the company the vendor owns, or as a sale of the assets and liabilities of the company, leaving the cash shell of the company in the vendor possession.

Will your business records stand up to due diligence?

Any potential buyer is going to want a full view of your company and as such, if they are really serious about buying (or investing) in your firm, they will want to conduct a due diligence audit as part of the sale closure process. This can be an extensive process, depending on the size and scale of your business. Nevertheless, undertaking one should be seen as a positive sign, but you must have prepared for this.

What will the due diligence process involve?

The simple answer is, everything, literally – from the business itself, its commercial and legal contracts, its assets and its people.

The type of company involved will of course dictate where the process may spend more time. For example, if you are a technology development company, focus may lie with ongoing development contracts, overseas facilities or contracts, ownership rights to key technology IP, technical competence in the company in the form of key personnel, etc. Generally though, the typical areas that detailed information will be requested on are:

  • Operations – typically everything from your products and services, manufacturing processes, product warranties, ongoing contracts with suppliers and other third parties, pricing, client contracts, profit margins and the company’s infrastructure, such as IT, software, etc.
  • Financials – cash flow statements, P&L, balance sheet, shareholdings, share valuations, expenses, debt, equity, depreciation and financial projections.
  • Asset base – from property, fixed and variable, equipment and Intellectual Property.
  • Compliance – financial returns, e.g. tax and VAT, insurances, any licences, any environmental issues.
  • Human Resources – company structure, external consultants / employees, executive and board bios, employee salaries, employee handbook, benefits, pension plans / policies, disputes, etc.
  • Sales and marketing – current programs and performance, budgets, etc.

This list is only meant to provide a perspective on what types of information will likely be requested. Based on your business type, Tax Agility will take a thorough look at the information that will likely be requested. We will work with you to ensure information pertaining to all the areas of interest are available and presentable.

Drafting of normalised earnings schedules

During a financial year there can be many financial events that impact a company’s apparent earnings. While there may be regular income from client contracts and investments, there can also be non-recurring exceptional income events, such as an asset disposal. On the flip side, there can be one-off non-recurring expenses such as a directors bonus payment, or the settlement of a legal claim. Furthermore, the nature of the business may be seasonal, meaning at any given time, the earnings position of the company may appear artificially high or low because most orders come through during a particular time of year or that suppliers may not have been paid. This variability makes it hard for potential purchasers to get a real feel for the business’s earnings over a year.

Normalisation, therefore, seeks to remove income or expenses that are exceptional or unusual, in other words, events that the new owners may not reasonably expect to pay. The process of doing this helps smooth out the effects of those events, presenting a normalised trend to purchases giving greater accuracy towards projecting future earnings and therefore the potential enterprise value of the company

TaxAgility will work through your operations and accounts to identify such events and produce a normalised earnings schedule (adjusted)  showing earnings over the current year and usually two preceding years.

Drafting of net debt schedules

The amount of debt a company carries affects cash flow, as interest expense flows into a company’s income statement. The debt balance appears on the balance sheet and the repayments the business makes on the principal sums owed flows through the cash flow statement. It’s therefore essential to make sure the debt a company carries and its impact on the company’s operations is clear to any prospective purchaser. This is where a debt schedule is key.

Many businesses are sold on a cash free, debt free basis, meaning the enterprise value of the business is calculated by computing enterprise value and deducted net debt.

Enterprise value is computed by multiplying sales or earnings or EBITDA by a suitable multiple (sales multiple, earrings multiple or an EBITDA multiple).

Adding the net cash in the business or deducting the net debt, from the enterprise value, to reach a net consideration for the share capital of the company.

Types of debt that is shown in the debt schedule include:

  • Loans
  • Leases
  • Bonds
  • Debentures

Tax Agility will assist in creating a Debt Schedule. This seeks to provide a realistic view of a company’s debt position, It shows debt based on its maturity and helps a prospective purchaser construct their own cash flow forecast and to structure the sale in the most sensible way.

Drafting of normalised working capital

Working capital, or rather ‘net working capital’, is the money relating to stock, accounts receivable and accounts payable left in your business, excluding Net Debt items.

Cash flow shows the ‘ebbs and tides’ of money coming in and going out relating to earnings, working capital movements, investments and disposals, shareholders withdrawals and injections and movements in net debt, over a specific period.

If your business income suffers a setback, such as losing a major client or through a wider economic downturn, it’s the cash or cash-like assets that you’ll need to turn to in order to ride out the problems. This is your working capital.

Normalising your net working capital takes into account the typical day-to-day fluctuations in levels of working capital the business experiences so as to provide a fair view. A business may experience seasonal swings in working capital too, this is also factored in. A normalised view can then be used when valuing the business. If this isn’t done, then irregularities can occur, such as the temptation by a seller to over value working capital by delaying certain payments. This would artificially increase cash equity value.

Tax Agility will walk through your working capital requirements and trends to produce a fair view taking into consideration all of the factors (and more) discussed above.

Management accounts while the business is being sold

The sale of a business can take some time depending on the size and scale of the business concerned. Meanwhile, normal business activities continue. It’s essential during this period to maintain a tight management view on the business’s operations, so as not to impact the due diligence audit taking place unduly, or as a tools to inform them of any important changes taking place, such as supplier or client changes, unforeseen cash or capital expenditure, perhaps due to unscheduled maintenance needs.

Management reports are a key part of any business’s reporting mechanism. They show a period by period (weekly, monthly, etc) snap-shot of changes in the business financial status. A typical management report can include:

  • Executive summary
  • Profit & Loss
  • Budget variance
  • Balance sheet
  • Aged receivables
  • Aged payables
  • Cash summary

You can read more about the importance of management accounts and reporting in our article here:
How can management accounts be used effectively?

Check out our other article on exiting a business here.

Conclusion

The process of selling a business is a multifaceted operation, one that can distract a business from its normal day to day activities. It’s essential to be prepared well before any potential suitors begin their due diligence process. In this way, you will minimise the impact on the business and make the due diligence process proceed faster and more efficiently. Resolving any deficiencies can increase the value you realise for your business by unlocking its true underlying value.

At Tax Agility our goal is exactly this – to prepare your business for sale and assist in making the due diligence process as painless as possible. Ultimately, we want to help you extract the maximum possible value out of the sale of your business as effortlessly as is realistically achievable.

Call Tax Agility’s business sale specialists today on 020 8108 0090 and discuss how we can help in the sale of your business.