How to Sell Your Business - Baker Tilly 050907
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Transcript of How to Sell Your Business - Baker Tilly 050907
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Simon MacGovern
Realising the value of your business
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Baker Tilly
• A leading professional services firm• Client base from OMB to PLC• Ranked 7th in the UK by fee income• 260 partners, almost 2,000 staff across 28 UK offices• A strong regional network with major offices in all key cities
throughout the UK• Represented internationally through our membership of
Baker Tilly International – 8th largest international alliance of accountancy firms
• Core services are: Audit, Corporate Finance, Restructuring & Recovery and Tax.
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WHERE IS THE VALUE?
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Theoretical Value
Multiple of turnoverMultiple of earnings
EBITEBITDAP/E
Net AssetsDiscounted cash flowIndustry-specific measures
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Worked Example (1)
ABC LimitedTurnover £15mEarnings before interest and tax £1mLong term debt £250,000Surplus cash £500,000
Illustrative EV/EBIT multiple 6x
Enterprise Value: 6 x £1m = £6mPlus cash +£500,000Less debt -£250,000Equity value £6.25m
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Worked Example (2)
ABC LimitedTurnover £15mEarnings before interest and tax £1mLong term debt £250,000Surplus cash £500,000
Illustrative turnover/EBIT multiple 0.5x
Enterprise Value: 0.5 x £15m = £7.5mPlus cash +£500,000Less debt -£250,000Equity value £7.75m
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Valuation (continued)
So why the difference?£6.25m vs. £7.75m
Value depends on your perspective…
Example (1): Standalone investment?Example (2): Bolt-on to existing business?
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Valuation (continued)
“The true value of a business is what someone is prepared to pay for it”
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What actually drives value?
Profit? Yes, but also…
Customer baseChannels to marketIntellectual property/know-howKey individualsReputationThe right place at the right time
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Case study
Specialist design/manufacturing company
Turnover £1.8mEmployees 6Historic net assets £19k
Price paid £7-9m
Why?
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Case study (1)
Significant strategic value to the eventual buyer (based in Australia). For them the business provides…
Access to a rapidly growing segment of the marketClient base in a particularly affluent industryMarket leading productsProtected by key IP assetsUniquely talented management (design expertise)
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Valuation - conclusion
Theoretical valuation is interesting, but may have limited meaning in a ‘real’ transaction situation.
The key to the value of a business lies in its value drivers. Realising this value depends on how the business is sold, when and to whom…
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WHEN TO SELL?WHEN TO PREPARE?
(There is a difference!)
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Timing of sale
Timing can be driven by any number of factors…
Personal motivation (retirement, ill-health, financial needs, diminishing fulfilment)Condition of the overall marketFinancial performance of your businessLevel of transactional activity in your industry
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Timing of sale – market conditions
Market confidenceStock market levelsInterest ratesAvailability of debt / equity funding
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Timing of sale – business performance
Can price expectations be met?SeasonalityWorking capital positionNew contracts about to be secured?When is your year end?
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Timing of sale – deal activity
Is your industry flavour of the month?Appetite from Venture Capital, for example, can drive pricing upwards – herd mentalityIs your industry consolidating?Is regulatory change driving deal activity?
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Timing – Preparation
The key to getting your business to market in the right condition and at the right time is early preparation
Adequate time for groomingTax planningMarket testing/researchEngaging appropriate advisersFuture plans?
In some cases this may need to start several years in advance of the final transaction
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WHO WILL BUY?
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Buyers
Broad categories of buyer include:
CorporateTrade buyersStrategic buyers
FinancialMBO / MBIInstitutional
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Buyers
The most suitable type of buyer will depend the circumstances…
MBO can work if there is a willing (and capable) management team and if funding can be sourced
A strategic buyer may provide a greater chance of achieving a premium price
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CONCLUSION
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Conclusion
Consider your route to exit well in advance
This will allow you to:Prepare the business for saleGet the timing rightUnderstand what drives the valueIdentify who will buy the business…
Thereby maximising value
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The tax implications of selling your business
John Kingsley
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Taper Relief
• 10% CGT is the “holy grail”
• Trading company
• Unlisted or officer/employee or 5% of votes
• Non-trading company
• Officer/employee and <10% votes
• 75% taper relief after two years
• Rules changed on 6 April 2000
• Don’t assume: check your status!
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The Charge to Tax on Sale
• But is CGT the only tax payable?
• Some specific sale circumstances can lead to some or all of the sale proceeds being charged to income tax.
• Anti-avoidance provisions
• Always seek HM Revenue & Customs clearance(s)
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Consideration for the Sale
• Many different forms:
• Immediate payment
• Payment in instalments – no deduction for delay
• Contingencies – no allowance
• Unascertainable – but still has to be valued
• Earn-outs – no different from above
• Try to avoid receiving deferred consideration payable in cash
• Tax liability on value not yet received
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Consideration for the Sale
• Paper for paper exchanges
• No immediate tax liability
• Swap shares for shares
• New holding treated as acquired on the same date and at the same value as the original holding
• Swap shares for loan notes
• Must be held for at least six months
• Are they qualifying corporate bonds?
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CGT More Than 10%?
• Shares owned less than two years?
• Swap shares for shares or non-QCBs
• Shares became business assets in 2000?
• Time-apportionment of gain• Cannot ever get down to 10%
• Cannot reset clock by passing to spouse or trust
• Shares not business assets?
• Currently 30% CGT, minimum 24% after 2007
• Pre-sale dividend?
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CGT Less Than 10%?
• Many planning arrangements no longer available, but bespoke planning might be possible
• Generally can still use:
• Payments to pension scheme
• Non-resident planning• NR for more than 5 years
• NR for less in suitable country using DTA
• Offshore trusts for non-doms
• Planning required, well in advance
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QUESTIONS?