Good morning, everybody, and thank you for joining our what's next if I want to exit my business via trade sale webinar.
I'm Zoe Davies and I'm a tax partner at Mazars in the UK and I'm head of privately owned businesses in London.
And I'm delighted to chair today's discussion on the potential benefits and the implications of selling your business, as well as outlining the necessary steps and considerations to bear in mind to ensure this option is right for your circumstances.
This webinar is part of our wider what's next series, which is taking place in the next few months, where we're focusing on the tax landscape, as well as maximizing your business value.
So, onto today's discussion then. I'm joined by two of my colleagues, Paul Joyce who is head of deal advisory in London, the one smiling and James Robinson senior financial planner in London, the one who's also now smiling.
We have around 50 years combined experience between us working with entrepreneurs and business owners and we work together at Mazars specializing in delivering a holistic service to businesses and their owners who are looking at their what's next. We're looking forward to sharing some of our experience with you today.
So, let's get on with today's discussion, then, and there will be a Q&A session at the end, please feel free to add in any questions you've got. Thank you to those who've already sent through some questions, and we will answer those, and we get there, so please keep them coming, if anything, comes to mind during the session.
And we're now going to get on with discussing one of the most important aspects of assessing your options when we're thinking about a sale.
So, first of all I'm going to come to Paul, thinking about how somebody’s objectives might influence whether a trade sale is even right for them to start with.
Paul, can you just talk us through the things to be thinking about and those factors, please.
Of course! And thank you Zoe, and good morning, everybody. I think this is a, this is a million-dollar question I suppose. When's the right time, what are the factors that you need to reflect upon when you make that move to sell your business, particularly for most people who are looking to start a business it's something that they’ve set up and have worked in and run for a long time.
Maybe it's the only organization you’ve ever worked in and probably the only one you’ve ever owned and so it can be a really big deal when you make that decision to sell.
The first thing that I always think about, assuming you've made that personal decision that the time is right for you to exit the business, is what are the priorities, what are you trying to get out of the transaction.
Is it to maximize the pound notes in your pocket?
Is it to ensure you can retire, with no obligations and spend more time with your family?
Is it that you want to ensure continuity for staff and for clients?
Is it because you want to get it done quickly because there's some tax or other reason to move with the expediency?
Or is it that you want to maintain confidentiality, you want to do something discreet that happens, quickly and without getting out into the market or to clients?
And I think the first thing we do every time is we sit down and talk through some of those aspects.
Sometimes you realize that actually a trade sale isn't the right option, and when you start to work through things there might be that other options are available.
One of the reasons we're running all these webinars, is that there are a whole bunch of options available to you if you're looking to exit your business, trade sale is one of them. And maybe it seems the most obvious. But actually, there are plenty of things that you can do, which aren't trade sale. So, once you run through those objectives, and when you start thinking about what's important to you, you might decide, actually it's not the right option, but it might be, and that's where we can help.
It's also a really emotive process, when you sell a business to somebody else, particularly if it's something that you've grown up with and for most people that I've met, most entrepreneurs I've worked with, see their business as more than just a business. It’s often their baby, something that they've grown up with and developed and it's very personal to them.
And getting through and thinking through that process and making that decision to sell can be very emotive for yourself, for your family, knowing what it means for staff. So, you know working through that and making sure you're comfortable with those decisions are really important first step. Because it's going to be difficult, and we end up finding ourselves not only advising from a financial perspective. But often adding in an emotional aspect and sometimes the best deal that we do for a client is not the most financially lucrative, but it has the other elements that mean you can be comfortable and happy. So, when you sell your business, you know it’s going to the right home, and you can feel that the staff and the clients and so forth, are looked after.
Sometimes having that first conversation and discussing the topic, whether it be with your family, whether it be with your staff, whether it be with your clients, whether it be speaking to a competitor, is quite a big leap. Speaking to a competitor clearly comes with commercial risks, this is somebody who you've probably been competing with for a number of years, somebody who you've been trying to take lines from, who you may be taking staff from, maybe you've fought competitively to grow the business more quickly, the idea of then suddenly getting into bed with them seems really difficult.
And so, you've got to assess that commercial risk, you know who are you speaking to what's the right amount information to disclose to them and at that stage what you don't want to do is have somebody who, we might describe, is going on a fishing trip, who comes looking for lots of financial and emotional information but has actually no real interested in acquiring your business. So be very, very careful on that front.
And then the flip side to that and the challenge of obviously the commercial risk is that it should deliver maximum value for you. Normally a trade deal is one that can deliver maximum value on day one, both in terms of overall transaction value but also the amount of cash received in your pocket up front. A lot of the other routes will have more differed consideration, continuing consideration, shares, and let's not say that trade sale won’t have some of those. But more typically there will be a greater proportion of that, which is paid up front and you would hope to achieve a higher value, because there will be an opportunity to bring the two businesses together.
There is that value because of synergies. What do we mean by that?
Well, it could be that you can share client so that means that you can cross sell, which is a fantastic opportunity. Might be that actually the business you're selling to doesn't need two finance teams, or two admin teams or two CEOs and therefore there are cost synergies.
The question you have to ask yourself, then, is what's the impact on the staff, what's the impact on my brand? is the brand going to continue, or is it going to be developed into the buyer’s brand, and what's the impact of that? Is that something that's important?
If the answer is they're going to give you the most value because they're going to fire half of the staff, you have to reflect on whether this is a sacrifice that you’re prepared to make, and the objective is to maximize value or actually need to be balanced against the idea of giving your staff and clients a good home.
And there's no right answer to that. That's for every individual to take on board and consider and think about and then make a decision that's right for them individually.
People say well what's more important value or confidentiality or speed?
It completely depends on you as an individual what you're trying to achieve in a transaction.
I've done some transactions where value was most important, I’ve sold businesses where we could have sold for a higher value, but people didn't want to sell to the competitor, who was building that higher price. There is no right answer to that, and I think you have to just take on your own personal objectives, think very carefully, discuss with some advisors and friends and family. Get that perspective and make a decision that you're happy with.
Paul, you've mentioned the phrase the right home a couple of times and I know how important that is. Have you got any sort of examples of where the right home ended up being something very different from what the client envisaged at the beginning?
And how does that journey work? I think it is a journey it's not like you know the right home on day one it's something that that happens over the course of that.
Can you give everybody a bit of flavour of what that looks like?
Yeah, of course, and sometimes you have to come in with a very clear view of what they want to achieve, and they tell you that there's a very obvious buyer who they want to sell the business to. Sometimes they need advice, because they can just go and do that transaction, I think that there's a couple of things that often happens during the course of transaction that led people to think that the right home is not necessarily the home they originally thought. Sometimes that same conversation happens with the bidders.
One of the things we try to do when we go and speak to people and speak to potential bidders is bring a wide range and some will be very obvious that you probably as an owner of the business thought of in the first place, and sometimes it's a real left field buyer. Can be somebody from our Australian practice identified or US practice who want to buy a business in the UK and actually there's some real strategic value.
A great example of that, we sold a couple of years ago a meat pie manufacturer and business based up in Scotland that sold pies into supermarkets and football grounds and rugby grounds etc. They were looking to sell, and we ended up selling the business to a Japanese wagyu beef cooperative based out of Japan. Zero overlap in terms of product, zero overlap really in terms of personality and style, this was a very traditional farm-based co-op in Japan. But they really wanted a distribution network into Europe and into the UK market in particular.
And the business we were selling, the meat pie manufacturers, actually knew all the major supermarkets and so actually for Japanese cooperative, that was an opportunity for them to take their wagyu beef products and sell it into those same supermarkets. Now I don't think anybody in their right mind would just suggest to them as a buyer.
But using our international network and having those conversations were able to unearth them as a buyer and that only came out through that process.
And sometimes that process, you know it may develop a new buyer, it may be that actually people's opinions and perspectives change you meet that obvious buyer, and you really don’t get on with them, or they have very different views of what they should do the business and actually that's not what you want. So, I think that evolution that discovery process of going through the conversations eliciting offers and going through due diligence actually can change and develop your view.
And that's why it's really important, because what you might think you wanted to start on the transaction might not be what you end up doing because your thinking and feelings develop as you go through.
Brilliant, thanks, Paul. And we've just talked a lot about you know the right home for the for the business and what's right for that transaction, James what are you thinking about when you're looking at this from a personal perspective for the shareholders.
Yeah, I mean Paul mentioned quite a few times there, it depends on what your personal objectives are about what you'd want to do with the business and what you'd like to have happen and when you then come to look at the personal finances it's a very similar question but addressed in a different way.
You really want to understand what is it that you want to do personally after this transaction is it that you want to go and start up a new venture, is it that you want to retire, is it you want spend time abroad, spend time with family, do you wanted to make certain gifts, buy that car that you've always wanted. We just need to understand what is it that someone wants to achieve personally and get an idea of usually how much they do want to spend or put towards each of these objectives, because that then helps us understand and helps us work out what it is they actually need from a transaction to do all of that.
It can be a really powerful tool, basically, what we do is we take everyone's objectives, everyone circumstances, from this we can model them forward and say, if you did all of these things is this going to be enough, how is it could you be a bit more efficient, how can you invest the money to get a bit more return.
In terms of going through that transaction as a powerful tool, it can help them and help whoever's going through that transaction understand what is it they actually need to get from the business to meet those next objectives.
So when fitting into that piece that Paul was saying about what is the right transaction for you do you want to go to a trade sale, that is going to involve staff members and cost efficiencies in that perspective, or would you want to accept a lower value still being secure in knowing that you can do whatever it is, you want to do next, but achieve a different objective at the same time, and by relation to the sales so it's so important to understand the objectives on every step of the way and not just think about what are your objectives for the company and what you want to achieve there, but also what is it you want to do, personally, and how do we get that all to tie in from both a corporate and personal perspective as well.
James just to give a bit of flavour on the way you approach that, is to model “ to death and beyond”, the only way I can describe this, so you're really considering all of those factors that are relevant and important somebody so that when they're having those negotiations, then, with their potential buyers or looking at the potential buyers and looking at how they want to price things, they've got that information of what they can or want to do so that they can make an informed decision about whether to go for the biggest deal or whether to go for essentially a slightly smaller but maybe the right deal for them for their employees, whatever it might be so it's that it's that empowerment point isn't it it's how you approach it.
And it can be an ongoing process through a transaction, things will change, things come up, values might change we've all seen that happen before. It's not just a one and done exercise it's something that, as you're going through you can say like well okay something's changed, how does this affect again, how does it affect the deal, and how does that affect me personally to understand can we still keep moving forward, do we need to take a different tack or have a different approach as well, but we've had meetings with clients where they're going through sale, we said look if you sell for this much you could just leave it in cash and not do anything else, and just sit on a big pile of cash and not have any risk whatsoever and you'll be absolutely fine.
And knowing that sort of information going into it can give you a confidence in negotiating if you want to push for a bit more, you can always try or just saying you know that we’re sorted, whatever it is let's just get on with it and move on to the next stage of our life, it can be a really, really powerful tool for people.
I was going to say I remember seeing that in a transaction we’ve had where the seller thought they needed X, to do what he needed to do, and actually James went through that process and showed that when you took what they wanted to achieve in terms of annual income in terms of capital assets, you can do it at about 10 or 20% less, that's not saying we go and necessary do a lower deal than we need to, but what it meant was that we could feel a lot more comfortable, knowing that we had a range of options that fit the criteria we were trying to achieve and actually enabled us to be more confident in the negotiation, rather than thinking well actually maybe there's only one deal or no deal that fit our criteria let's keep going in and try to grow, the business a bit more actually gave them the comfort that the value of the business that we're going to achieve for them, was able to deliver everything they wanted from an objective perspective, which I think actually is very powerful and thinking about it from a different way around people think they want to achieve 10 million or 20 million or 5 million, whatever that number is and sometimes it's not that number it's a different number, and you can help them work through that process.
Exactly and when coming to work out that value as well, one thing that we can't forget in in all of that is tax as well, I mean, Zoe, what would you add on the tax side in terms of value there.
Of course, and it's that number that everyone just likes to forget about isn't it you look at the deal value and that's the exciting one, you know that that Paul goes in and worked out and tries to negotiate, but what does that convert into that's really important and knowing how that is going to be taxed and what is that tax leakage, if you want to put it that way, to know then, what is the number that James you are working with for the shareholders with what can be used to fund their personal circumstances and lifestyle and needs. That's really important, and you know we're looking at differentials, if you get it wrong if that's the right phrase and we're taxing it at income tax rates, which can and does happen, it can be 45-47%.
If we're getting it a capital rates, we are getting business asset disposal relief, which can be 10% or 20% and those differentials really large on these numbers sometimes and can make a substantial difference to what somebody can and can't do.
Actually, you know, Paul and I have had this where you know the deal value can be influenced if we can get the right structuring to get the right tax output. Because it's it might be the same number in somebody's pocket, you know that that is being paid for in a different way by a buyer. So get the buyer you want in the right structuring to get the net number to be correct, can make a big difference than to negotiations as well and it's something that comes up and we see this regularly with the buyer you are discussing with how amenable are they to what do you want to sell and how do you want to sell it etc, because that can really influence so we'll come on to that in a second, but it really does fit it's the link between the deal value and then what you can actually spend as an individual.
Let's move on, then so I'm thinking about okay how we've done all that we've had the discussions about what we're trying to achieve as a business what we trying to achieve personally. If you're thinking Okay, this might be right, I want to, I want to think about this dip my toe in the water.
How do you even do that what, how do you start to prepare a business?
It's normally a once in a lifetime transaction for people I suspect everybody's not gone through it before that's on this on this webinar.
Paul, can you give us a flavour?
Yeah, of course, and I think that point is hugely important, it is probably the largest financial transaction that most people will go through in their life selling their business. And I think about a stress that I went through when I sold my house, you know, most of the business we deal with are you know worth a multiple of the value of that and it just shows you how important it is and, for me, the most important element to think about is that the best time to start is today.
Doesn't matter if you want to sell a business in six weeks six months six years starting to think about what that process is going to look like what you might need to do, whether it influences decisions that you make as a business is really important, and sometimes we get caught up and say look, I want to sell my business as soon as possible, and sometimes people say I’ve got no interest in selling my business today, but at some point they're going to want to retire and starting to think, even if it's in a very light way about what you're going to need to do, you should start that process right now.
The best processes, the most efficient processes, the best value all come from businesses that start thinking about it as early as possible.
You want to start a business and six years you start thinking about it today, I mean I'm being slightly facetious clearly in that but there are decisions you're going to make over the course of next 2-3-4 years there will influence the value and your ability to sell a business.
If you're the CEO the business, as well as the main shareholder and you're only standard think six weeks before you want to sell about who's going to take over, that's never going to be as well thought through and you're never going to get as good a person as if you thought about that three or four or five years in advance.
If you are going through a due diligence process you're going to need you know well prepared information and financial information, you know if you start to think about that six weeks again before we start the process and somebody wants information cutting the same way that you do today, but two or three years old that's going to be much more complicated much more difficult because you have to go and recreate things if you started preparing information on that basis today.
It means that you're just business as usual and in three- or four-years time you have three- or four-years worth of information that you're able to share with the buyer at the click of a button probably rather than going to have to recreate it.
I think we then get into the detail, you know, there are a number of areas that you want to be thinking about succession planning, who's to be taking over your role and all the role of other people or interesting or indie that that people are going to between now and when you want to sell a business that you need to replace so thinking about what the succession plan looks like.
You're going to have to prepare financial information and that's probably going to be forecasts and historic information prepared on a consistent basis and with a level of detail that's going to give a buyer somebody that doesn't know your business at all sufficient information to work out the trends and the margins and growth rates in the business.
You want to start thinking about operational excellence and that's a very easy thing to say a very difficult thing to achieve in practice, but it means thinking about your processes and procedures could they be a little bit better can we put some processes in place that just tidy up some areas of the business, whether it be IT, whether it be financed, whether it be customer engagement that means when we go to market, the business looks as good as it possibly can.
Do we need to do a review of contracts so maybe customer contracts, maybe employee contracts, maybe lease contracts? Are they all consistent, are there any anomalies in there, are there some old terms and some new terms, the process of doing due diligence is an intensive and difficult one?
The easier, we can make it for a buyer to go through review customer contracts, for example, and say Okay, there is a standard customer contract, and we just have to look at the pricing and maybe the obligations and the SLA is under each those contracts, rather than every contract is bespoke and slightly different. You're going to require a lawyer and the other side to go through and review, you know 50 100 200 500 different individual contracts that takes time it erodes confidence and erodes value.
You know, thinking about when your lease is up do you want to sign up to a 20 year least two years before you want to sell a business may not be the right thing to do, you may save yourself a few pounds on manual least costs. But you might find that it reduces the pool of people who want to buy a business because you're tied into 18 years of 20-year lease with no break floors. So, thinking about those things as you go through the process in advance of going into a process is hugely important. It can make a difference between you getting the value between selling to the buyer you want to sell to or not.
The way I always think about it is going back to the house analogy, you know when you come and sell your house you wouldn't do so without tidying up without putting a fresh the campaign without putting away the rubbish that has been sitting in the corner the lounge for a couple years you make your house look as nice as possible to attract the widest range of potential buyers and attract the highest price, you should do that at 100 fold with your business. Going through that spring cleaning process thinking in advance about what you want to do what you need to do to go through the DD process.
But it's hugely important, and it can be the differences, I say between selling the business and not selling it or selling it at the correct value. And so, I always say that preparing the business is the most important thing you can do and thinking about as early as possible is really reinforcing.
I would definitely say reduces stress levels, you know that the earlier, you can start the better all these things can be dealt with a I’ve seen you do it Paul.
But you know for you selling the business and having less that you're juggling in that respect it's it, you know it does seem to help with stress levels and speaking of stress levels I’m going to mention HMRC at this point, and so Paul's mentioned, you know tightening everything up as early as you can. And I would add, HMRC to that list in spades if there is anything that that that the buyer is going to potentially pick up, you really would prefer not to be doing that, at the during those discussions.
You know, as Paul said it's the same thing in our road in competence and everything else, and what you can do is if there's anything any skeletons in the closet in respect of HMRC you can get those looked at sorted before this even happens tidying up the balance sheet, etc. And, and I saw something actually recently a couple of days ago got published about HMRC response times at the moment, which I was really pleased to see was published because I’ve been dealing with this, I think the last couple of years now response times, where we would have got something back within a week is taking months.
At the moment, it's just it's a completely different landscape it's different for clearances there are certain things you go to HMRC for an opinion which they have to reply within say 30 days, which they are adhering to that, but it's a really important time to gain early with HMRC is my flag I think it's what I’m trying to say there so definitely be looking at that and add that to your list as well.
So conscious of time, what are the main things to be thinking about when selling to a third party pulled this Paul back to you at this point pros and cons of this as an actual exit route as the as the choice of how to sell.
It’s not surprising that there are numerous things to think about and pros and cons.
I think a number of the pros tend to provide you with a pretty clean exit you know tends to be 100% of sale of shares, not always but, more often than not.
And for you individually as a CEO shareholder it tends to mean you can walk away for the business and the business will be run by new business new management team, new operators, and it means you can walk away without having to spend the next two three years of unwinding or transitioning the business, you know there's often a transitional period, but that tends to be 3-6-12 months.
So, you tend to better walk away pretty clearly from a deal like that you know that compares to say you know selling maybe to private equity, whereas a very different transaction very different structure. It's likely, although not always to be the highest value, the theory of that being a bidder in the same industry understand your business and therefore to get a pay a higher price than somebody who doesn't understand the industry. And also, they should be able to generate some economies of scale, or some synergies which will enable them to buy at a higher price than a standalone buy, who's buying to run the business in the same way that you have done historically. That's not always the case, sometimes people will pay a premium because it's a new business to them a new area, they want to get into.
Maybe it's a new geography, for them, and therefore they pay a strategic premium to somebody who sits next to you doing the same thing as you but, more often than not would see that as being the highest value and again you tend to get a greater proportion of that value in cash. Most people most trade buyers want a full exit for the persona business again, unlike, for example, a private equity sale, where they're looking to tie some of that value and value creation into shares or contingent elements now again there may be differed parts, there may be contingent elements, but you tend to get a greater proportion of cash so it's that clean 100% sale that tends to be why people go for a trade exit.
The cons are actually I think more difficult to quantify. It’s easier to identify, more difficult to quantify so today's commercial risks so you're probably as part of a DD process going to be releasing some sort of sensitive information to competitors, it might be client lists, it might be margins, it might be suppliers, it might be information on your key staff, what they're being paid, you know these are really important things to you as a business and therefore speaking to a trade buyer- a competitor can be really risky in that respect, if you release low information don't get a deal done there is a risk to the value of your business going forward.
The second I think is a risk of continuity, you know the benefit of clean exit is you walk away the downside is you have no influence on control what happens to the brand, staff, your customers under this new ownership.
You know I’ve seen businesses have been bought by large trade buyers and the transition has been wonderfully smooth and you know the staff have been retained and the customers have a great experience and I’ve seen others were either staff are fired, or they choose to leave, but because the culture or environment is very different. Sometimes customers, particularly if you're saying to a larger buyer will say well you know, one of the reasons I was with you was because I liked your personal you know commercial approach that was much more tailored you know selling to a large brand, sometimes can mean that the quality goes down or they're getting more generic service more used to a large organization and that's actually maybe not what the staff and the customers wanted when they joined and signed up and used you as a provider.
There are some more personal things you know what's the legacy you want, for your business is that important to you. If the brand maybe has your own name or is something that you invented a number of years ago, you know, seeing that disappear can be difficult, is that important?
Because if you sell to a trade buyer its highly likely that they will want to roll your brand into their brand and that brand name may disappear there's a lot more uncertainty, probably for staff and that can you know that can be genuine uncertainty that comes of likelihood of redundancy, but also people are unsure about the buyer which can create some uncertainty within that group, even if it's unfounded, even if you know that it's a great place for your staff to go to.
Unless you communicate that well with your staff, they may not realize that can lead to resignations it can lead to lower productivity, so you know it can be very difficult, I think, to manage that process, I find the pros are very financially driven the cons I think tend to be quite personal and more commercial and everything much more difficult to quantify.
Which probably Paul links back to what you said at the beginning, around being really important to understand you know it's important and also getting in as early as possible to help manage some of these some of these points.
So, we're going to talk tax for a second because it's my favourite subject. and so just to give you a bit of an overview about how this can be taxed and there's two key things here to think about who is selling what they are the two variables and when I’m saying, who is it the shareholders that are selling a company or is it a company selling a company.
So have we got a single company that we're selling or have we got a group structure where we're selling perhaps a subsidiary company from a holding company we've got different taxes from different aspects and also what are we selling are we selling the whole company or are we selling assets out from that company, for example, the trading assets, as opposed to the whole company and all to taxed very differently and to give you a field service an individual sale, I would hope we're thinking about capital gains tax, we should be on a trade sale, there are complications with some other sales but on this type of deal I would expect it to be pretty safe from a capital gains tax perspective, which is good at the moment with taxes, no political comment from me at this point, unless someone asked me a question we've had some great questions so I’m going to make sure I get to those.
But really, it's probably capital gains tax much better rates at the moment 10% if you get entrepreneurs relief now business asset disposal relief, if not 20%.
As an individual level fairly good in respect to those tax positions potentially an annual allowance available to you as well you can get HMRC clearance on all of that, depending on the deal is unlikely to be needed, quite frankly, but otherwise check it, and give the advice at the time.
If you've got the company selling if the company is selling a company, we've got corporation tax in fact that the company selling assets and the trade we've got we've got corporation tax, which at the moment 19% potentially going up to 25% again political comment here but we'll see where we are. But there are reliefs we can be getting on that potentially so substantial shareholding exemption if we're selling the company to be thought about and again, we can get HMRC on that which is quite nice if appropriate.
And the reason to run you through all of that is to give you an idea of all the permutations that are there and actually what's really important is what do we want to be selling.
And when I’m thinking about it from a tax perspective, what gives us the minimal tax exposure. And is that palatable to the buyer so going back to Paul now on what buyers have we got what are they willing to buy, what we would like to sell is this is that palatable can actually be incredibly important, and part of the negotiations, because if we can be sensible, with our tax planning and not pay any more than we need to that can then help James with his planning in respect of okay what money have we got what can we play with here so there's quite a lot to think about it's the most one of the most straightforward exit routes and respect attacks, but there's a lot of permutations here, which is quite good and helpful to get to the right answer so.
Just a point to raise on that as well as always so we've had an example where someone sold the business and so he sold his business with cash remaining within a company structure so sold from out within the group, they then change, but then after he decided that he wanted a large sum of capital to buy a property which hadn't been factored into the original because plans have changed.
So it required an extra level of work to then get that cash out in a tax efficient way as well, so it's again just like saying it's thinking about what is it you wanting to sell but also what is it you wanting to get out into your hands and sometimes the tax on the immediate sale of the company might be less, but if you're then needing to get out into a different environment that could possibly create more tax overall.
So, the further ahead, you can think about all these different things the much better the overall position would be.
Absolutely and James I’m sorry to do this to you, but I think I haven't been asked the question, yet, but I suspect it's coming if I don't.
And when we're thinking about that, so you know for a tax perspective potentially with the shareholders selling their company we're converting from my perspective, what is potentially a nice inheritance tax efficient asset into cash we've got quite a lot of tax exposure there, which we can you know look at, but we need to be mindful of and just your comments, one on that aspect of you know, whatever IHT exposure we've got thoughts on that, and then, what do you do so in this market at the moment, and what are your thoughts I mean it's quite an interesting time, so please.
Two very simple questions to cover.
On the inheritance tax side, I always come back to the inheritance tax, it's always down to how much the person creating that cash wants to deal with inheritance taxes.
Ultimately inheritance tax isn't the problem of the person only, it's the problem of the family of the past, no money down to and try and leave as much money left over now going through a transaction is a serious life event and a lot of the time if someone's been running a business that has been the majority of their life for a long period of time and they might need some time to actually settle into what is the new lifestyle and they might not yet be ready to make big decisions about giving large sums of capital into trust or to family or deprive themselves of an asset which is usually what you need to do for inheritance tax planning.
So as just an initial stop gap, one of the things we look at is just saying right well how about we just try and park, the tax liability if that's a concern to you and just ensure the risk so just take out insurance policy that if you die, then you can at least cover the tax difference that's been created by converting that asset into cash giving time to go through things now some people might be completely confidence, say, I want to do other things and I know what is, I want to do and I’m comfortable giving money away to family now, in which case great we can get on with that sort of planning. But some people aren't quite so sure, so you can at least buy yourself some time and to put it in context I had a couple in their early 60s wanting to ensure for 2-million-pound tax liability, for a 10-year term, it costs them 1200 pounds a year to ensure for the liability.
The risk of the tax becoming payable is low on second death, because the risk of two people dying is low, but it's just something you can just park the risk for a little while and give yourself time to figure out.
On the market side I don't have my crystal ball working today, so I can't tell you exactly what we should do. I mean it's really important question to think of how it is you're going to be investing this money, it can be a significant amount of capital that you've got coming in, so you really need to be clear about how you should be investing the money not only intelligent how much risk, you should be taking, but what sort of income, you want to be generating. Do you want sustainability criteria being included, how do you make everything fit where it is you want to do, and the time skills you've got as well a way of helping to manage some of the volatility we've got at the moment is if you're not going to be needing the money for a long period of time, where you can look to invest it anyways so it's not too critical. but as a way of as a way of limiting the impact of short-term volatility what you can look to do with your drip it into markets over time.
So rather than buying all investments on day one, you can look to phase it over a period with buying different assets, so instead of just buying certain price into the market, you can buy over six months, say, and that, while the markets fluctuating if there has been a fall in value since we first invested at least you're buying at a lower level over time.
But of course, the converse is true if the market goes up, then the cost of buying is has been increased so it's a volatility dampener over those first few months is the way to look at it in a way of managing your risk some people might want to put it all in day one, because another doesn’t need it.
Brilliant thank you James.
Conscious of time I’m going to go and do our key takeaways.
Please just 10 seconds, because we got some brilliant questions coming through and I want to spend the time on those.
So, from a tax perspective my key takeaway will be conduct tax health check, as early as you can and really think about structuring don't just go for the obvious one
Paul key take aways from you?
I always start with the why I think about what is, you want to achieve first rather than jumping
straight to the answer which is often people think they know what they want to do, but when they think through, why they want to do, it turns out to be not the right answer.
Okay, James financial planning.
Mine is to start early as Paul already been saying, as well, but start at not only thinking about the business, but your personal finances and how they can fit into the transaction as well, and how it can all fit together.
Right off to some questions, then, and the first one we've got through is when is the correct time to tell him for us about trade sale Paul with you.
This is almost an impossible question to answer, to be honest, there isn't any such thing as the right time. You got to assess what your relationship is with the staff who the buyer is how important those staff are, how important confidentiality is because that all, you know runs into whether you're tell earlier or later, so the risk clearly of telling people later is they can be disgruntled you know if your deal is so far advanced, you can’t unwind it you find that actually staff we're going to quit having found out thankfully that's a really material risk potentially.
The flip side is, if you tell people before you even start a process and you've got no visibility on whether deals going to happen.
You know, there may be leaks in terms of confidentiality, they may tell their friends, they may get to competitors if you're trying to sell and it may be that you end up not selling the business and therefore you've spooked and unsettled people, and I think it really depends on a number of factors that we tend to sit down with people, and I would go around telling people earlier rather than later it tends to be when you're pretty certain you're going to go to an event, I think you don't want to start ruffling feathers too far in advance. You know, make sure it's actually looks like you're going to have a transaction and then try to engage with people as well on a personal level.
I think you know and not, I think anyone would here, but you know sending an email to start saying, by the way, we're being sold is very different to a town hall, or maybe one to one meetings with everybody if you've got a pretty small team explaining what the situation is while you're going through what you're going to go through you know how you feel about them as individuals, the most important thing I find is engaging with those employees and doing it in a proactive way run the reactive way.
Rumours, tittle tattle around the water cooler, people hearing things people seeing people in suits turning up to the office unexpectedly that that unsettles people and unsettling people, particularly in people businesses isn't not a good thing to go through once you're you know, trying to sell a business you want things to be running smoothly, efficiently, you want to be hitting budget so I would want earlier rather than later, but it really does depend on your business who you're selling to and the ratio, if you have those employees and maybe the number of employees, you have but it's definitely something worth discussing and debating.
Because getting it right and getting it wrong not just a difference in terms of how the staff feel but genuine in terms of you know, the ability to sell business if you're two three key staff leave because they give us a rumour that you're going to sell.
You know that can destroy your value, potentially, so you know engaging earlier, I think, is my general advice on that front.
Thank you. Next question and I think this came in just before I talked through the tax implications, and I’ll talk through the questions there's two parts to it.
So how can we maximize the net value received by a sale by reducing the tax implications what mechanisms are available to hold on to the best value amount from a sale so I’ll cover that bit and then I think Paul, this is for you, how can we determine the maximum EBIT multiple my industry is policy manufacturing so just to cover the attack side, how to maximize the net value received by reducing the tax implications it will it will depend, what do you need to sell so what has value is it the company itself, is it the assets in there. I normally want to sell the company over the assets as a as a standard rule.
So, whether it's a company selling the company, whether it's the individual selling the company we normally want to sell the whole company from a tax perspective that normally better.
And how do you do that so from a personal perspective we do probably want to be making sure it's capital gains tax rates, however, some circumstances, actually it's better to not to keep the transaction lower and therefore draw down and have had this scenario where it's actually better for the individual, just to draw down dividends over the next 30 years than it was to actually realize a capital gains tax on the sale we're looking at seven and a half percent dividend rates as opposed to 10% entrepreneurship rates so every scenario is different, but often it is realizing the transaction at the individual level at capital gains tax rates, but it can be, it can be a different way.
Just add on to that as well there's then also at the personal level there's an investment that you can look to go into that have their own tax relief as well, so we can look at the likes of enterprise investment schemes or venture capital trust that have 30% tax relief on entry and then some other tax benefits as well, but they are higher risk as well, so it comes back to what is right for you, is it worth going for that extra tax relief or would you rather just know that you're taking a lower level of risk and that you've got your second chance of bit more simple moving forward, but all down to what is that the right person to achieve.
Brilliant. Thank you, James.
Paul, how can you determine the maximum EBIT multiples.
Well I’m actually going to answer this question with a bit of a political sidestep and the reason I say that is that EBIT multiples is important and it comes down to that, I think the next question it maximizing the EBIT or is it about appropriate positioning of the business it's showing the business in the right light it's showing really the USPs particularly to some individual buyers there might be different USPs two different buyers.
And I think it's about really accentuating those and maybe having a slightly different or tweaked information memorandum for each of the different bidders or each different groups of bidders.
Because what's important to a bidder, you might be coming from the US and they're buying because they want the UK presence could be very different to somebody who has a factory next door to you, and therefore sees a huge opportunity to bring the factories together and create economies of scale so tailoring that message to the to the buyer is really important, but I also think what's really important is thinking about what you're applying an EBIT multiple to, and I know at the moment prices at the moment are you know at its historic highs and what that tends to mean is that profitability on plastics businesses is depressed at the moment and therefore thinking about timing so it's now the right time to sell a business like that, and secondly positioning the EBIT.
Maybe the reported EBIT is lower, do you want it to be, but actually there are some clear steps as to why that's the case so you know when my prices returned to the more sensible level actually be the EBIT immediately improved by 10 or 20% so part of my job is to maximize that multiple that part of it is to maximize the number we're applying it to, so we might get you it's actually better to get six times five rather is to get you know seven times two, so you know the actual enterprise value is going to be higher, so we work to really maximize not just EBIT presenting, but also the multiple so it's a bit of a combination of both.
Now our last question.
So, this is we've been through a process over the past six to nine months that has resulted in some interest but no deal.
We realized now, on reflection, that the advisors, we work with and the IM that was prepared effectively miss positioned our business and some of the parties we approach with put off by that positioning in some ways, we need to start again, do you have any thoughts on timing for that, in terms of perhaps going back to some of those parties and, more particularly, how can we unwind the relationship with the current advisors who are on the contingent element relating to intros and conversations started in this previous process.
I realize it's quite a tricky question this this person has said, but actually Paul I suspect it's not tricky for you so over to you.
I'm not sure about that I think if I asked the last bit first if we see that in play into situations, has been a fair process, maybe the advisor sound done the right job and spoken to the right people, it'll depend a lot on what the contractual arrangements are in those cases.
Sometimes it'll be just related to businesses that were introduced by the advisor sometimes I’d be a tail clause and it might be a period of time, sometimes those exist, but a sensible conversation revised says look it's not worked.
We don't want to be on the hook to sell a business, you know that you fail to do so in paying you a fee for something you have not achieved.
So sometimes there's a sensible discussion and whether that's to eliminate that feel reduce it that's sometimes the right answer. Because the numbers at stake are big enough to mean that you might have to pay to fees, but if you can reduce one and receive the money you need.
That can be the right answer. sometimes it's a case of just waiting it out until the until the tail clause is expired and therefore the fees is no longer with you, I think in terms of timing, to go and re-engage with those people and I talked about a little bit and that first question it's so important about a position of business it, it really is and it's about thinking about who the buyers are and what are we trying to draw out from those buyers in terms of things that we should be excited about our business and it shows there that if you get that right, you can get a great deal if you get it wrong actually a buyer that would have bought a business is put off because it's not the right way position they're not thinking about the opportunity in the right way, so that's such an important element of selling your business getting out positioning and thinking about the who, the buyers are and then say maybe it's about having you know bespoke IM for each file for each group of buyers that enables you to have a slightly different message.
You know, highlighting the key things to those individual buyers in a specific way, rather than just in a generic way, in terms of re engaging actually we see that quite a lot and sometimes the passage of time, helps sometimes having a slightly different approach, sometimes that message was delivered differently by someone different can make a difference, I think you really need to sit down and understand why the process didn't work, you know, was it the wrong time for those buyers was it, as you say that it was positioned incorrectly. Can you go back and reposition that might be a passage of time, helps with helps with sort of easing a bit of distance between those original conversations I think it really depends on what happened, and I’d be delighted to engage on a personal level, and just know how to chat through what we think the issues were.
And that will absolutely then drive what the what the right response will be it might be like you scorched the earth, for a period of time, you need to step away and leave a bit of time to pass or might be likely we just need to go speak to a different person at that organization, we to engage at a different level.
We might have personal relationships with some of those buyers and can and can adopt a more discreet and direct conversation maybe we don't have a big process at all, maybe there is a group of buyers that we didn't think about in the previous process that we can go and speak to so there's lots of ways, you can adopt it. I've seen plenty of process that have failed that have then reignited and executed, but each one of those the answer was different and the way we approached it was different but just because you've been to a failed process does not mean you can't be through a process successfully what the key is a good definition of insanity is doing the same thing over again expecting to resolve what you need to do is it's going to do things differently to achieve that different result.
That's cool I’m conscious we're five minutes over so thank you everybody for sticking with us, and I will now wrap it up and just thank you all for joining us and thank you to Paul and James for giving that insight as well.
One last question I just saw.
Very good, can we engage him as a potential exit the honest answer is, would be the three of us delighted to pick that up offline if you want to drop us an email, very happy to have a have a conversation just to talk through what you're thinking about how it would work.
You know, even if you choose not to engage with us just you know we can help talk to how that process works and get you thinking about some of the things you want to be thinking about so we're very happy to that would be, it would be the three of us, it would be doing that, as we have done on numerous sales.
The day job isn't it.
Excellent sorry just making sure I didn't miss anything else so um where was I wrapping up and saying thanks for joining us and, and this is part of our series we've had some already and we've got more coming with different types of sales.
In the meantime, we have released our latest newsletter which covers the exit options available, and we've also got our previous webinar on what's next to fund growth in your business, so we'll share those with you, along with the recording of today's sessions and our contact details, so you can get in touch with us if you'd like to do so.
If you have any questions at all, and please do get in touch happy to help you want to talk through your specific circumstances also happy to do that have an initial meeting if needed to talk through the right option, it is our favourite thing to do, so thank you all for joining us really appreciate your time have a lovely day take care it's all.