Kirkpatrick & Hopes - Succession Planning Accountants

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Selling your business – when and how

Despite all the talk of recession, there seem to be a lot of talk at the moment about selling businesses. (Interestingly though, no one is talking about buying business, so who are sellers going sell to?) The reason for this mainly seems to be the increase in the tax rate by 80% from 6.4.08 (for most business owners the rate of tax goes from 10% to 18%). My feeling is that by rushing a deal through before 6.4.08 to save tax is likely to be a false economy- the buyer’s bargaining position will be much stronger if he or she knows that the seller is working to a deadline.

But there is another less urgent reason. This was highlighted in a recent E-Myth Worldwide newsletter. This looked at the demographics of typical business owners, mainly in the US but the same applies in the UK.

If you own a small business, you are probably a baby boomer aged between 43 and 61 years old. The article goes on to say:

“Whatever your age, be aware of the coming tide of businesses for sale as boomer business owners retire, liquidating businesses for retirement assets. What are your plans for your business? …sell soon ? …sell later ? …have the kids take over ? …just close the doors ?

A solid exit strategy will anticipate trends and steer towards your favoured goals. And having documented systems in place will increase your business’ value, and will ease the transition to new ownership.

What’s Your Exit Strategy? It was Benjamin Franklin who said “By failing to prepare you are preparing to fail.” We recommend that you design an exit strategy before the market is awash with businesses for sale. Perusal of the popular press turns up numerous articles on this coming tide, as do web searches on terms like “boomers selling their business”. The approaching events are clearly on the radar of mergers and acquisitions firms and financial advisors.

PriceWaterhouseCoopers found half of US business owners plan to sell in the next decade. Another source expects 40% of family-owned US businesses to sell within five years. What should you be doing now? Factors favourable to sellers include times of economic expansion, low capital gains tax rates and low interest rates. Negotiate cautiously, as small business owners are likely to sell exactly one business per lifetime, while active corporate buyers work multiple deals each year.

Consider that

  • Active buyers have the advantage in business valuation and negotiation
  • Business-valuation-by-owner is often low, typically minimizing profits for taxes’ sake
  • Business owners are often impatient to sell
  • A vital negotiating point is the strength of your documented business systems and financial statements. Turnkey systems add to a business’ value and ease the assumption of control by new owners. In this area particularly, an E-Myth’d business will have a value significantly higher than a similar business without documented systems.”

Many of the business owners I speak to have an unrealistic idea about what their business may be sold for. It is never too early to start thinking about the steps that need to be taken to increase the value of your business.

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