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27 August 2019

Looking Ahead—How To Build Business Value

Forward Thinking Business Blog –

There is a lot to plan for if you intend to sell your business at some future date. You may have only a vague plan in your head at this stage, but it is never too early to begin building business value.

Set clear goals

A useful starting point is to think about what you want to achieve from the sale. Whether you want to sell to fund your retirement or to invest in an alternative venture, you will want to maximise the proceeds of the sale and minimise any tax liability that may arise. For example, depending on your goals and the likely timing of any future sale, there may be opportunities to enhance your business value by changing your business structure.

Tax incentives such as entrepreneurs’ relief can reduce your liability for capital gains tax on the proceeds of the sale provided you comply with the relevant conditions.

Be clear about what you want to achieve from the sale and what you would be prepared to settle for.

Understand what your business is worth

Obtaining an independent valuation of your business for information purposes will often highlight opportunities to enhance value. A valuation will also provide a baseline for negotiations with any prospective buyer.

Identify buyers

Making a list of potential buyers and thinking about what is likely to matter most to them is another useful exercise. You may need to get some help with this as it can be difficult sometimes to see your business objectively if you are too close to it. Remember that different buyers may have different priorities which could affect the price that they are willing to pay.

Focus on financials

Buyers will always want to see financial data for several years preceding the sale. Planning early will help you to identify areas where cost savings or efficiencies could improve your bottom line and enhance the value of your business for a potential purchaser.

Build a good team

Buyers will also want to feel confident that the business can continue to run successfully when you exit so it is important that it is not overly reliant on you as an individual. Valuing your staff and building a strong team will enhance your long term business value.

Just as over-reliance on the owner can undermine business value, so over-dependence on key customers or key suppliers is detrimental because it increases the risk for the buyer. What if the supplier goes out of business or if customers move on once you have left the business?

De-risking your business by putting the correct systems and processes in place will give comfort to your buyer that the business can continue to thrive without you.

Boost working capital

Optimising working capital will also enhance business value because it boosts cashflow and profitability. Strategies that can boost working capital include:

 

• Prompt invoicing
• Managing stock and work-in-progress
• Controlling costs
• Managing overheads,
• Reviewing contracts and negotiating better terms with suppliers
• Swapping short-term debt for cheaper long-term debt.

Emotional impact

Remember to factor in the emotional impact that selling your business may have on you and your family. Good communication is important in this regard. Making sure that everyone affected by the future sale understands that there are sound business reasons behind it can help to avoid disputes and conflict.

Lifecycle

Previously on this blog, we talked about the three distinct stages in the lifecycle of a business owner.

 

• Stage 1 is when your focus in on growing your business;
• Stage 2 is when you being to plan for your eventual exit from the business.
• Stage 3 is when your exit transaction takes place. This final stage should be as brief as possible to avoid disruption to your business.

 

If you would like to more information or assistance on building business value…

It is never too early to start building business value, says Michael Farrell.

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Contact Michael

Michael Farrell / Director

m.farrell@fpmaab.com

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