By Andrew Walker, below, Partner and Head of Corporate Growth, Morton Fraser
In this uncertain economic climate, considering a business exit may make sense to some business leaders and entrepreneurs who will need to be prepared in the event that they need to sell quickly. Currently, taxation is favourable for business leaders in the UK looking to exit due to Business Asset Disposal Relief which reduces tax on the gain to 10%, up to a limit of £1 million for each individual selling. But, in coming months, we may well see the new Chancellor introduce changes to the way that exits are taxed.
The combined impacts of the economic forecast as well as potential changes from the Government and its respective Chancellor might well therefore serve to expedite exits among those seeking to cash in before HMRC tax rules are changed.
There are a whole host of different ways to exit a business. This includes, but is not limited to, selling to an Employee Ownership Trust, selling to a family member, a management buyout, arms-length trade sales or IPOs.
Regardless of which type of exit a business owner chooses, and with economic (tax) reform potentially looming, it is more important than ever for businesses to get their ducks in a row ahead of time to allow them to exit quickly and efficiently, should the time be right.
One important first step for any business who wishes to be prepared when considering an exit would be to carry out a mock legal due diligence test. A legal due diligence test can usefully stress test all legal aspects of a company and its business – it typically analyses areas such as company licences, HR issues, regulatory issues, contracts, and any legal liabilities that may be pending.
Completing a mock legal due diligence exercise like this beforehand will allow a business leader to identify any red flags or weaknesses in the business that they may want to address and iron out early and before selling.
This level of preparation is often crucial and valuable. A mock legal due diligence exercise can help a business leader to ensure all relevant information and documentation concerning the business is properly organised and in order ahead of a sale, often averting potential problems arising down the line which could delay the process of selling the business. Compiling this information properly beforehand typically assists in speeding up the process of exiting.
But a mock legal due diligence test can not only spot the red flags relating to a business, it can also help business leaders understand the real commercial worth/inherent value in the business which can helpfully assist in price justification discussions with potential acquirers.
Ultimately, a buyer is interested in the business, its systems and customers and not the owner. The more that a business owner can remove themselves from the daily operations of their business, the easier it will be to sell the business and secure an offer they are willing to accept.
Carrying out a mock legal due diligence exercise and lessons learned can enable a business owner to become comfortable in their ability to ultimately sell the business and remove themselves (perhaps in a phased handover way) without impacting the commercial value of the business to the buyer’s detriment.
Moving through the mock legal due diligence process may make selling a business seem like a lengthy procedure. But, by beginning the process ahead of time, business owners can gain a deeper understanding of the process, ensure that any glaring problems in the business are fixed from the outset and ultimately, learn when to make their move in any economic climate.