Maximising the value of your business even if you are not ready to sell yet

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In the latest UK200Group blog post Paul Hawksley, Partner TWP Accounting discusses the importance of planning well in advance of an exit.

Paul Hawksley
For most small business owners and entrepreneurs their business is their most valuable asset and therefore it is imperative to maximise the value when the time comes to sell. As potential buyers will always look at profitability for a number of years, it is important to start planning well in advance of the time of any planned exit. Most SME business will be valued on a multiple of historical profits or earnings. The multiple applied to the business will ultimately be derived by how desirable the company is to a purchaser. Therefore in order to maximise the value it is possible to either increase profitability or make the business more desirable or better still do both! Here are ten key steps that every business owner should consider:

1) Increasing sales – as the value of a business is dependent on the profits it can generate, it is likely that improving sales will result in a substantial increase in value.

2) Reducing overheads – again, any reduction in overhead will increase profits and therefore increase the value. A thorough review should be undertaken of all services purchased by the business to ensure they represent value for money.

3) Reviewing financial systems & controls – robust systems and controls will provide comfort to the buyer that a business is well run and managed. Documented procedures should be put in place and followed around key systems such as sales, purchases and financial reporting.

4) Differentiating your products and services – products or services that stand out from competing products will be more attractive for a purchaser. Products that stand out from competition have a competitive advantage other similar products and therefore derive a higher value.

5) Customer contracts – contracts with customers, will provide any buyer with a greater level of certainty of future income and therefore will decrease the risk of losing customers for the purchaser. Any buyer will attribute a higher value to business with recurring future income preferably from a larger number of clients. Any contracts will need to withstand legal due diligence.

6) Intellectual property & assets – any buyer will want evidence of ownership of assets including patents and trademarks therefore it is important to ensure these are registered properly. It is also important to ensure that any assets are correctly accounted for within the financial statements and shown on the balance sheet.

7) Reliance on owner – the less reliant on the owner the business is, the more desirable it will be for an acquirer as there will be lower risk when the owner withdraws from the business. Good systems should be put in place for product development, customer retention and delivery of service.

8) Employees – employees are key to a business’s future success and any loss of key staff should be prevented. To ensure that key staff are retained this can be achieved through bonus plans or employee share schemes such as an Enterprise management incentive (EMI) scheme . It should also be ensured that all staff have valid employment contracts with enforceable non-compete clauses where applicable.

9) Compliance with laws and regulations – during due diligence a thorough review will be undertaken to ensure that there are no legal irregularities, compliance with legislation such as GDPR, National minimum wages, Minimum wage and employment law will be scrutinised. Any non-compliance will have a significant impact on the value of the business. It is therefore important to ensure the business has appropriate policies and procedures in place.

10) Consider taxation of sale – whilst this will not strictly increase the value of the business it is important to consider how any disposal would be taxed. Generous reliefs such as entrepreneurs relief and substantial shareholding exemption are potentially available, but have qualifying periods. Therefore these must be considered in advance and planned for.

Tags: UK200

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