Tag Archives: businessvaluation

DRESSING UP YOUR COMPANY FOR SALE

The following are some ideas that should be explored in order to maximize the amount of money that the vendors receive and to show the company in the best light:

  • Take out all or part of the cash  There may be no need to keep all the cash within the company. This could be distributed by way of dividend, payment into the owner’s pension fund or repayment of any directors’ loans. Alternatively if it’s more tax effective to do so, then the sale price can be inflated by the cash at bank figure so that in addition to the agreed purchase price, the purchaser pays “cash for cash”.
  • Make sure NAV matches up with p/e, ROCE valuation  Sometimes the Net Asset Value (NAV) is out of kilter with any normal valuation of the business, this can for example be because the company owns its premises. In that case it may be sensible to move the property into the director’s pension fund and lease the property back to the company; this will reduce the profitability but will transfer an asset with a good yield into the director’s pension. You should do the calculation to see if the benefit of extracting the property asset from the company exceeds the resulting reduction in the goodwill value because of the lower profit figure.
  • Repay directors’ loans  These should be repaid prior to a sale, if the cash is available. If it is not then they will normally be repaid out of/deducted from the sale proceeds at completion.
  • Sell car to owner   Very often the owner will have a car that they will want to keep after completion but which is owned by the company. Legally the company is entitled to keep the car, however if the owner wants to keep it, it needs to be either transferred before completion or specifically identified and excluded in the sales memorandum.
  • Do a stock-take  This should be done before putting the company on the market as this is the classic area in which purchasers chip away at the price. The vendor needs to clear out or write off any old or redundant stock so that the balance sheet is a true reflection of the company’s net worth.
  • Clean up the balance sheetThe projected completion balance sheet should look clean and tidy and not contain any items which need explanation or which cause the purchaser to worry about the can of worms he is about to buy!

Call now for a FREE, no obligation business valuation. Your call will be treated in the strictest confidence and of course, places you under no obligation. Call now on 0800 046 1792.

THE PROCESS OF SELLING A COMPANY

The traditional/usual steps involved in selling a company are as follows:

1)    Groom the Company for sale and clean up the Balance Sheet

2)    Finalise the Completion Balance Sheet and the Adjusted EBITDA

3)    Fix the Asking Price based on the Balance Sheet and Adjusted EBITDA

4)    Draft and issue the Sales Memorandum

5)    Deal with Purchaser enquiries

6)    Ensure Purchasers have funding capability

7)    Obtain Offers

8)    Accept an Offer

9)    Negotiate and agree Heads of Terms (HoT) between Purchaser and Vendor

10)Agree a timetable for completion

11)Purchasers begin commercial and legal due diligence

12)Purchasers begin accounting due diligence

13)Purchasers’ solicitors issue draft Share Purchase Agreement (SPA)

14)The terms of the Share Purchase Agreement are negotiated and agreed; it includes Vendor Warranties; TUPE obligations; Tax Deed – warranties and Indemnities; Payment terms including any escrow payments or deferred payments, earn-outs etc

15)Remove personal guarantees with Bank; obtain Bank’s approval to sale if required.

16)Exchange & Completion of the Agreement is usually simultaneous primarily because the trading of the company is a moving target and the warranties and completion accounts are only valid and applicable at the time of completion

Call now for a FREE, no obligation business valuation. Your call will be treated in the strictest confidence and of course, places you under no obligation.

Call now on 0800 046 1792.

SELLING A COMPANY

INTRODUCTION

The first thing to get right in company sales is to find out whether the purchaser is buying the shares in the company or the assets out of the company.

A company is a separate legal entity and it (not the shareholders) owns its assets. The shareholders own shares in the company which in turn owns the assets.

Consequently if the shares are being sold then the vendors are the shareholders.

But if the assets are being sold then the vendor is the company.

Often a purchaser will want to buy the assets from the company, because they are easily identifiable and the purchaser does not have to worry about what else may be inside the company.

A vendor on the other hand will generally want to sell his shares in the company because it is considerably more tax effective for him to do so.

PURCHASER BUYS THE ASSETS OUT OF THE COMPANY

If the parties agree to do an asset sale then the Vendor will be the company and it will be selling certain nominated assets such as Plant, Stock and Goodwill. It may also be selling its Debtors or the Purchaser may agree to collect the Debtors and pay them to the vendor company as part of the sale price.
Normally in an asset sale the vendor company retains the liabilities and uses the sale proceeds received to pay them off. Once the liabilities are paid off the remainder of the sale proceeds are retained in the company, or paid out to the shareholders as dividends, or the company is liquidated and the cash paid to the shareholders. These last two alternatives have significant tax implications.

PURCHASER BUYS EVERYTHING INSIDE THE COMPANY

When a purchaser buys the shares in a company he buys the company and everything inside it. Unless specifically excluded in the share purchase agreement (“SPA”), this includes stock, creditors, liabilities, plant & machinery, employment obligations, lawsuits, claims, real estate, cars, goodwill, IPR (intellectual property rights) and cash.

This means that a company should be groomed for sale before the sales memorandum is issued. If there are any problems or issues within the company such as loans to directors or claims by employees, then generally these should be solved before issuing the sales memorandum or should be fully disclosed within it. A purchaser will inherit all of those problems and liabilities if he buys the company so he needs to know about them before doing the deal and he may discount the value he places on the company in order to take account of those problems.

Similarly there may be surplus cash balances or loans from directors or banks which may need to be distributed or repaid before completion or to be specifically identified in the Sales Memorandum either to increase or to justify the asking price.

REASONS FOR A SHARE SALE

The reason why a vendor will be so keen to sell his shares rather than for the company to sell its assets is principally tax. In essence if a vendor sells his shares then, provided the company fits within certain criteria set out by HMRC, he will pay Capital Gains Tax at the rate of 10% on the gain between what he paid for the shares and what he sells them for less transaction costs. This is known as Entrepreneurs Relief. (There are some exceptions to this rule but generally in the case of a typical owner/manager, this is the case).

On the other hand, if a company sells its assets then it will pay corporation tax on the gain it has made on the asset sale (there is no capital gains tax for companies) being the premium paid over their book value. The cash then sits inside the company and can generally only be distributed to the shareholders by way of dividend or by liquidating the company and distributing the cash reserves to the shareholders.

ADVANTAGES OF A SHARE SALE

These are some of the advantages of pursuing a share sale:

  • Appearance of continuity of business. A change of name or trading style may give the impression that the business has changed hands or worse, gone bust and done a phoenix.
  • There may also be customer and supply contracts which will be difficult to re-write in the name of a new company.
  • It may be easier to get a landlord to agree to the change of shareholding rather than having to enter into an assignment of the property lease; and it will almost certainly be considerably less expensive in terms of legal fees.
  • Intellectual Property Rights (“IPR”) traditionally are messy and complicated, particularly copyright in software. It may be almost impossible to create a chain of title and even more difficult to get all parties to agree to an assignment from the company to the purchaser. It may be considerably easier to “let sleeping dogs lie”.
  • A purchaser may prefer to leave the company’s banking arrangements in place; this is particularly the case in respect of leased plant and machinery and term loans. Although a bank will normally want to be satisfied as to the probity and credit-worthiness of the purchaser.
  • The company may have historical tax losses inside it, which a purchaser may find useful. A vendor may try to increase the price because of these tax losses although that is difficult to do and most purchasers will not pay a premium for them..
  • There may be other contractual arrangements also in place with the company which could be difficult to assign to a new company, such as options arrangements with staff, other employment contracts, future royalty contracts, licences etc.
TAX & STAMP DUTY

As stated previously the sale of shares in a company for which the vendor gets Entrepreneur’s Relief, attracts a 10% flat capital gains tax rate provided the shares have been held for more than 1 year.

If a company sells its assets then it pays corporation tax on the gain and the shareholders pay income tax on any dividend distribution of the asset sale proceeds.

Stamp duty is 0.5% on a sale of shares and on other property (such as debtors and real estate) it is a sliding scale up to 7%.

Call now for a FREE, no obligation business valuation. Your call will be treated in the strictest confidence and of course, places you under no obligation.

Call now on 0800 046 1792.

What Is Business Valuation?

Quite simply, business valuation is a process and a set of procedures used to determine What Is Business Valuation?. While this sounds easy enough, getting your business valuation done right takes preparation and thought.

Business valuation results depend on your assumptions

business-valuation

For one thing, there is no one way to establish what a business is worth. That’s because business value means different things to different people.

A business owner may believe that the business connection to the community it serves is worth a lot. An investor may think that the business value is entirely defined by its historic income.

In addition, economic conditions affect what people believe a business is worth. For instance, when jobs are scarce, more business buyers enter the market and increased competition results in higher business selling prices.

The circumstances of a business sale also affect the business value. There is a big difference between a business that is shown as part of a well-planned marketing effort to attract many interested buyers and a quick sale of business assets at an auction.

Expected selling price and business value

Hence, business value is really an expected price the business would sell for. The real price may vary quite a bit depending on who determines the business value. Compare a buyer who wants the business now because it fits important lifestyle goals to a buyer that purchases an income stream at the lowest price possible.

The selling price also depends on how the business sale is handled. Contrast a well-conducted business marketing campaign and a “fire sale”.

Three business valuation approaches

That said, there are three fundamental ways to measure what a business is worth:

  1. Asset Approach
  2. Market Approach
  3. Income Approach

Asset approach

The asset approach views the business as a set of assets and liabilities that are used as building blocks to construct the picture of business value. The asset approach is based on the so-called economic principle of substitution which addresses this question:

What will it cost to create another business like this one that will produce the same economic benefits for its owners?

Since every operating business has assets and liabilities, a natural way to address this question is to determine the value of these assets and liabilities. The difference is the business value.

Sounds simple enough, but the challenge is in the details: figuring out what assets and liabilities to include in the valuation, choosing a standard of measuring their value, and then actually determining what each asset and liability is worth.

For example, many business balance sheets may not include the most important business assets such as internally developed products and proprietary ways of doing business. If the business owner did not pay for them, they don’t get recorded on the “cost-basis” balance sheet!

But the real value of such assets may be far greater than all the “recorded” assets combined. Imagine a business without its special products or services that make it unique and bring customers in the door!

Market approach

The market approach, as the name implies, relies on signs from the real market place to determine what a business is worth. Here, the so-called economic principle of competition applies:

What are other businesses worth that are similar to my business?

No business operates in a vacuum. If what you do is really great then chances are there are others doing the same or similar things. If you are looking to buy a business, you decide what type of business you are interested in and then look around to see what the “going rate” is for businesses of this type.

If you are planning to sell your business, you will check the market to see what similar businesses sell for.

It is intuitive to think that the “market” will settle to some idea of business price equilibrium – something that the buyers will be willing to pay and the sellers willing to accept. That’s what is known as the fair market value:

The business price that a willing buyer will pay, and a willing seller will accept for the business. Both parties are assumed to act in full knowledge of all the relevant facts, and neither being under compulsion to conclude the sale.

So the market approach to valuing a business is a great way to determine its fair market value – a monetary value likely to be exchanged in an arms-length transaction, when the buyer and seller act in their best interest. Market data is great if you need to support your offer or asking price – after all, if the “going rate” is this much, why would you offer more or accept less?

Income approach

The income approach takes a look at the core reason for running a business – making money. Here the so-called economic principle of expectation applies:

If I invest time, money and effort into business ownership, what economic benefits and when will it provide me?

Notice the future expectation of economic benefit in the above sentence. Since the money is not in the bank yet, there is some measure of risk – of not receiving all or part of it when you expect it. So, in addition to figuring out what kind of money the business is likely to bring, the income valuation approach also factors in the risk.

Call now for a FREE, no obligation business valuation. Your call will be treated in the strictest confidence and of course, places you under no obligation.

Call now on 0800 046 1792.

The Five Step Ladder to Determine Business Value

Business valuation could be a method that follows variety of key steps beginning with the definition of the task at hand and resulting in the worth conclusion.
5 step ladder to business valuation success
The 5 steps are:

1. Designing and preparation

2. Adjusting the money statements

3. Selecting the valuation ways

4. Applying the chosen valuation ways

5. Reaching the business worth conclusion

 

Step 1: Designing and preparation

Just as running a thriving business takes designing and disciplined effort, effective valuation needs organization and a focus to detail. The 2 key beginning points toward establishing your business value are: • Determining why you wish business valuation • Assembling all the desired data. It may appear shocking initially that the valuation results area unit influenced by your would like for valuation. Is not business worth absolute? Not very. Business valuation could be a method of activity business value. And this method depends on 2 key elements: however you live business worth and below what circumstances.

 

Step 2:Adjusting the historical money statements

Business valuation is essentially AN economic analysis exercise. Not astonishingly, the corporate money data provides key inputs into the method. The 2 main money statements you wish for valuation area unit the earnings report and therefore the record. to try to a correct job of valuing a little business, you ought to have 3-5 years of historic financial gain statements and balance sheets out there. Many tiny business homeowners manage their businesses to scale back rateable financial gain. Nevertheless once it involves valuing the business, AN correct demonstration of the complete earning potential is crucial. Since business homeowners have extensive discretion in however they use the assets further as what financial gain and expenses they acknowledge, the corporate historical money statements may have to be recast or adjusted.

 

Step 3: Selecting the valuation ways

Once your knowledge is ready, it’s time to settle on the valuation procedures. Since there are a unit variety of well-established ways to work out worth, it’s a decent plan to use many of them to see to it your results. All acknowledged valuation ways represent one or a lot of those elementary approaches: • Asset approach • Market approach • Income approach

 

Step 4: Range crunching: applying the chosen valuation ways

With the relevant knowledge assembled and your selections of the business valuation ways created, shrewd your business worth ought to manufacture correct and simply excusable results. One reason to use many business valuation ways is to see to it your assumptions. For instance, if one business valuation methodology produces astonishingly completely different results, you may review the inputs and think about if something has been not noted.

 

Step 5: Reaching the worth conclusion

Finally, with the results from the chosen valuation ways out there, you’ll create the choice of what the business is value. This can be known as the business worth synthesis. Since nobody valuation methodology provides the definitive answer, you’ll conceive to use many results from the varied ways to create your opinion of what the business is value. Since the varied valuation ways you have got chosen could manufacture somewhat completely different results, closing the worth needs that these variations be reconciled. Business valuation consultants typically use a weight theme to derive the business worth conclusion. The weights assigned to the results of the business valuation ways serve to rank their relative importance in reaching the business worth estimate.

 

Call now for a FREE, no obligation business valuation. Your call will be treated in the strictest confidence and of course, places you under no obligation.

Call now on 0800 046 1792.