Birmingham Post Article - March 2011

by Lucas Markou, partner at Solihull-based accountants and business advisors Jerroms LLP, reports on a notable change in the Budget

Business owners work hard to create value through good and bad times, and they are rewarded by salary, dividend or profit sharing as they do so. But, for many, the big pay-off is on a sale.

One reason for this is that salaries and dividends are taxed at income rates of up to 50 per cent, while capital gains tax rates are much lower.

Even better, from April 6, subject to the Budget proposals passing into law, the first £10 million of an individual's lifetime gains will only be taxed at ten per cent in many circumstances.

This rate is payable because owners, whether principal shareholders in a limited company, parters in a business or sole traders. One of the conditions is that the business must have been owned for at least a year.

Selling a business is not the only option for an owner who wants to move on. Family businesses can continue to trade with the next generation for example, and there can be the options of a merger with another business, leaving the entrepreneur with a stake in the larger business.

Often, however, following generations are not interested in being involved and merger options can be limited and problematic. The option of selling to managers is severely limited by a shortage of bank and private equity funding.

If it is to be sold, the business has to be in good condition and the time has to be right. As regards condition, there should ideally be a period of tidying up. What can be done depends on the time horizon.

The business has to be profitable, with potential to develop further.

A good spread of key customers usually helps. Patents and trademarks should be registered and appropriate contracts and terms of business documented. Employees should have contracts of employment, for example, restricting the ability of key executives to compete if they leave the business.

One vital area is management information, including budgets. A prospective buyer will normally value a business based on future earnings and will insist on using past management accounts and budgets to underpin prospects. Professional help with negotiating the deal is vital.

As regards timing, this should ideally be when profits are at least solid and beginning to improve. Depending on the nature of the prospect buyers, there are other factors too. 

For example, a shortage of bank lending finance, such as we are currently seeing, can restrict the number of privately owned buyers.

However, many large listed companies have substancial cash resources and some private equity sources are in the market for deals at a reasonable price.

The key is planning ahead and taking advice early; in general, the longer the time lead, the better the deal.