Welcome to Query Of The Week
Welcome to this week’s Query Of The Week. Each week our technical team respond to a huge number of client queries and in this segment, we share with you the most common questions that keep coming up time and time again.
In this week’s Query Of The Week, John Murphy discusses what the key considerations are when buying and selling a business, where he covers the general process as well as some key points to keep in mind to make the sale or acquisition as simple as possible.
Buying and Selling a Business
If this Query Of The Week was of interest to you, you will also be interested in our Buying and Selling a Business online CPD course.
Full details for this online CPD Course can be found here:
| CPD Allocation | 1 Hour |
| Fee | €25 (or 1 CPD Club point) |
| Presenter | John Murphy – OmniPro |
| Category | Corporate Finance |
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Query Of The Week – Video Transcript
(Please note that this is a direct unedited transcript of the spoken word as recorded on the video)
Hello and welcome to this week’s query of the week.
A couple of weeks ago, a client came to us and said they’d been thinking about selling their business and they wanted to get an idea of the steps to take to test the market. If the results were satisfactory, they would proceed from there. The key thing with anybody starting a business is that first of all you need to make sure that the client knows that when they sell, they’re out of the business, and that’s it. Some people just need to be advised of the fact that sold is sold. So, make sure that is what they want.
Before that process, we would discuss, and decide, on the potential purchasers. In this particular case, they had a prospective purchaser in mind. This potential purchaser had acquired similar businesses in the area. This then made the process easier in that they had a preferred purchaser from the get-go.
The next stage was that they wanted our idea of the value of the business. Obviously, a Valuation would have to be carried out. But as I always say to a client, a valuation is a valuation. This is what we say it’s worth. But, it’s only worth what the purchaser is willing to pay. In that particular example, I suggested a high-level valuation which would give an idea of where we believe the value is, and you can have that as an average. However, the key thing would be what the potential purchaser wants to pay.
The next part of the process was to determine what was lying in the company that the purchaser wouldn’t want. In this example, there were various investment properties that the purchaser wouldn’t be interested in because they just want the business. So, what I advised in that particular case was to transfer out the business into a new company owned by them. It maintains all the release of transfer of undertaking. It maintains all the release from, you know, CGT return, CGT return, relief, employer relief. All those releases (the ownership periods & directorship periods) were well maintained because they all transfer over to the new company. And then, you know, that made it more attractive for potential purchasers to buy a newer company with assets belonging only to the business. The old, non-trade assets were left in the other business.
We then contacted the purchaser and told them our client was thinking of selling, we described the type of business, the kind of customer, and asked if they would be interested. From there (and this is an ongoing sale), the purchaser came back and said that they were interested in buying this business.”At that point, in conjunction with the client, we issued a confidentiality letter. That’s the next stage. You’re not going to release an information memorandum unless you get a confidentiality agreement in with the purchaser, to make sure they’re not going to leak the fact that our clients are trying to sell their business. So, you must have that in place before you give any information memorandum.
The next step then is, is, we draw up an information memorandum to the purchaser. What is in that information memorandum? It contains details of the history of the business, the business activities, the strengths, the weakness, the opportunities that were available in that business, the analysis of the customers. Just in high level, not giving customer names, only details of top paying customer turnover levels, details of the customer base by type, by location. It was all relevant for the purchaser because, that’s effectively what they’re buying in the business, its customers.
The information memorandum then describes the management team, the employees, the number of employees, how long they’ve been there, so it gives the purchaser an idea of what they’re buying. All that detail is included in that information memorandum. The financial summary is also in the information memorandum. We usually present it in a formal PowerPoint presentation. The financial information would be high-level turnover, gross profit, admin, distribution expenses, profit. All hugely relevant detail. Likewise, we’d have the balance sheet for the previous three years in that submission. And then, at the end we clarify what the information memorandum covered and ask for an indicative offer based on the information provided., We encourage them to look for any other information that would help them make an offer. Importantly, we also ask that they provide us with evidence that they have finance available to make the purchase.
So, The information memorandum was sent off, obviously after receipt of the signed confidentiality letter and now, it’s in the purchaser’s court. So, they’ll have a set date by which to come back, and at the moment that date hasn’t arrived, so we’ll wait and see
As part of this, our client looked for our advice from a tax perspective on what would happen if he did an earnout. We’d be happy enough to do that. I’d just advise the amount of earnout; if there’s a maximum earnout from the CGT perspective, he would have to pay the tax at the time of the sale, even though he might not get that in two or three years. So, he just needs to be wary of that, when he’s determining what price he would get upfront. Likewise, if he was thinking of deferring. I did, obviously warn about section 135A 3A, in relation to, income tax versus CGT.
There are a lot of things in relation to advice around buying and selling businesses. This was just a snippet of advice we gave to a, a real-life customer just recently.
We have a buying and selling webinar that’s coming up on the 10th of April. If you’re interested in this area, we would be looking at what we’ve talked about. We’ll also be looking at due diligence, the reports, what way they might be laid out, how to finance it from the purchaser’s perspective, the advantages of buying a business and disadvantages of buying a business versus buying shares. I go through that in a lot of detail and if you’re interested in the area, please, erm, you know, come on to the webinar on the 10th April.