Thinking About Buying/Selling a Business?
In the recent climate you would have predicted that buying and selling of businesses would take a back seat, however, there are a number of business owners that are capitalising on opportunities to expand by acquiring a business or selling their own business.
The common types of business buying and selling we have seen recently are selling/buying businesses to/from competitors or suppliers and selling part of a business to get an injection of capital.
What we have also seen is that there is greater emphasis placed on the due diligence process to ensure the business being sold/purchased is ‘water tight’ given the recent economic downturn.
So what are the factors to consider when buying or selling a business?
Factors to consider when buying a business
- Why is the current business owner selling?
It is important to understand why the business is being sold, has the current owner reached the end of their business lifecycle? Are there issues with the business with cashflow or financials? It is common to think that when a business is being sold there must be something wrong, therefore, it is important to understand the reasons why it is being sold.
- Price
In the current climate, there seems to be an opinion that businesses should be discounted to take into account the ‘Covid 19’ factor. However, more often then not this may not have a significant impact on a business’s value if it has been managed properly throughout the crisis. It's important when buying a business to review the financials and use an advisor to workout the appropriate value of the business to ensure it is not overvalued.
- Due diligence
The most important part of buying a business is the due diligence. The type of due diligence completed will depend on the size and type of acquisition but at the minimum there should be financial and legal due diligence completed. The due diligence process will help understand the key issues facing the business and the potential risks that can arise.
- Funding
It is important to understand how the business acquisition should be funded, for example will there be any debt funding involved, if so does this hinder any potential future funding that can be used to grow the business later? Additionally, it is important to consider if there is any debt in the business being taken on and how this will impact future cashflow and plans post acquisition. Often business owners spend little time considering funding options when acquiring the business and funding position post acquisition, however, careful thought and planning is vitally important to ensure the business can succeed.
Factors to consider when selling a business?
- Price
It can be a difficult task to ascertain the ‘right’ value for your business, however, using your advisor you need to ensure all factors are considered in the value, for example earnings potential, client contracts and existing debt. More often then not, business owners are keen to sell as they believe their business is worth a lot, however, in reality when the initial valuation is done, they tend to change their mind!
- What is being sold?
The most common sale occurs when a business owner sells the shares in their business (i.e. the business as a whole). However, there is an option to just sell the trade and assets and not the whole business. It’s important to understand what type of sale will maximise value for you and is better suited to your requirements.
- Timing
There needs to be a consideration whether now is the right time to sell. Often owners sell as they believe the value of their business is at an optimum or they’re fed up of the business. It’s worth considering that if you waited another year, secured more long term contracts with clients, would the business be worth more? Sometimes, having the plan to sell the business in a few years drives owners to grow the business and reignites their passion.
- Tax and cashflow planning
There needs to be a review of the tax position the sale will result in, as sometimes business owners are shocked to find out how much of the proceeds are paid out in tax. Additionally, it is a possibility that the buyer may not pay the full sales price initially but pay in instalments or on a contingent basis where certain targets have to be met by the company post acquisition. There needs to be a consideration if this would work from a cashflow perspective for the seller.
There are of course more factors to consider when buying or selling a business that are dependent on individual situations, however it is vitally important to consider all factors and make the decision that is best for you now and in the long term.
If you would like to learn more about selling your business or buying a business, please get in touch with me at mehul.thaker@raffingers.co.uk.