Birmingham Post Article - September 2011

Lucas Markou, Tax Partner at Jerroms, looks at the vital facts to bear in mind when it comes to selling a business

The last three years has been a difficult time for owner managers and other business owners looking to exit.

Business values have suffered from the aftermath of the banking crisis and the recession, not to mention the threat of further economic troubles.

Profits, the key driver for business values, also fell back for many and the number of potential buyers has been limited by aversion to risk and the continuing lack of availability of bank finance.

On the other hand, many companies are seeing a future of improved earnings, having cut costs and eliminated unprofitable non-core activities.

The prospects for selling a business are likely to improve in the future, though vendors will have to be realistic in their asking prices for the foreseeable future.

Selling a business is a different skill from running it and professional advice is essential for what is usually a once-in-a-lifetime deal.

In any event, the key for realising value in an exit is early planning.

For example, if the vendor wants to retire completely, he or she may need to relinquish some of the levers of control so that there is a broadly based management team prior to sale.

Secure and robust customer relationships can be vital in a sale and can take years to build.

To achieve a good selling price for the business, vendors will need to show that the customer links are secure and that markets for products are robust with strong projected margins.

Sellers need also to make sure that the management accounts are accurate and that the budgeting track record stands up to scrutiny; the input of a professional accountant can be vital here.

Key directors, managers and employees should have appropriate contracts and intellectual property like patents should be in order.

There are also tax considerations. For example, Entrepreneur's Relief can result in the first £10 million of a lifetime gains for each individual only being taxed at ten per cent rather than the normal capital gains tax rate of 28 per cent.

To obtain this favourable treatment, the taxpaying shareholder has to meet a number of conditions including holding at least five per cent of the shares for a minimum of a year.

Planning again pays off as it may be possible for a husband and wife to transfer shares between themselves to shelter up to £20 million of gain, saving up to £3.6 million of tax. Apart from the sale, the future of the business can be secured through the the involvement of the next generation or through a management buyout deal, where non-family management teams buy the business.

However the former depends on the interest shown by the following generation and the latter on the willing involvement of financial backers including private equity investors and bankers.