When most businesses are created and evolve in their life cycle, a significant motivating factor in running the business is tax minimisation. For most privately owned businesses there is a greater emphasis on minimising taxable income rather than maximising profit. This places a lower emphasis on profitability and the maintenance of an existing lifestyle is the priority.
Such a structure does not make a business look attractive to those that would pay a premium for a business, namely a strategic buyer. When a near term sale event is needed, often the true value of the business is not realized by the seller.
Are you ready?
We are encouraging businesses to review their performance and determine whether their business is ready for a potential investor to step in and pay top dollar for the business. Even if you are not contemplating a liquidity event within the next 5 years, a healthy checkup is good practice, as you never know what cards life can deal you.
In the event of an untimely death or incapacity of the owner, is the spouse or children able to take care of the business and maximise the sales potential if a succession plan is not in place? I know we don’t like to think about these things, but consider the additional burden you will place on your loved ones if they needed to face this issue.
You may need several years to maximise the value of your business so you need to start now. We believe there is a tremendous opportunity to increase profits through eliminating waste in your business. Simply pumping more incremental top line revenue through a production process that is not maximised will not yield the results potential buyers are looking for, namely cash flow.
We suggest a three step approach to getting your business ready for an inevitable transition and maximising the value of the business.
Step 1: Optimise performance through profit improvement
This step is extremely important as it frees up cash to invest back into the process of getting your business ready for a transition, namely funding step 2 and 3. These savings will be realised every year forward, so even if a transition does not happen, the benefit far outweighs the cost of doing.
Step 2: Polish the Business and Solidify Growth
This is done through recurring, locked in revenue, a solid management team, branding, and cleaning up the balance sheet.
Step 3: Control aspects of the Sale to your advantage
This includes negotiating strategies, finding the right buyer, overcoming seller objections and value reducing tactics. We also suggest incorporating an overall risk management strategy into the process to reduce the risk that the transaction will not be as successful as expected.
This entire process typically takes 2-4 years, however getting started on the first step to improve your profitability should be a no-brainer. Speak to your Business Advisor on how you can get started on the business value maximiser process to identify the short term opportunities for improving your profit (and cash flow).
Rouse Partners is a long established west of London based accountancy and business advisory firm. Please contact our team of business advisors if you would like to discuss your exit strategy and selling your business.
Award-winning chartered accountants offering tax, audit and advisory services.