Preparing your business for a sale

In an ideal world, you should start preparing your business for sale at least 18 months before you put it onto the market. Some simple changes can have a dramatic impact on the sale price that you achieve.

For example, the profit that you declare during your last financial year will be a very important factor in determining the sale price. This can be increased by postponing capital expenditure, cutting costs and asking your accountant to prepare the audited accounts in a less tax-efficient way than usual.

With a letting business, most buyers will pay more for recurring income than for one-off income. Consequently, persuading your landlords to switch from let-only contracts to management or rent collection contracts can have a significant impact on the price.

Another thing that you might consider is transferring your lettings business into a separate limited company. This gives you the option to sell the lettings book and the sales business to different buyers and still qualify for the ten per cent entrepreneurs’ tax rate. However, under HMRC rules, this must be done at least 12 months before the sale.

Finally, you need to check that your compliance is 100 per cent perfect. Missing documents, such as gas safety certificates, HMO licences, tenancy agreements or landlords’ signed terms and conditions, can spook a buyer and cost you a sale. This is so important that you might even consider getting an independent compliance expert in to conduct a formal audit of your business.

Be sure that your compliance is 100% perfect. Any missing documents can spook a buyer.

Getting the best price

The best price is not the highest headline price. It is the net proceeds after tax and disposal costs. This can be very confusing for sellers.

For example, a lot of businesses are worth much more for break-up than they are as a going concern. In such cases, the obvious thing to do would be to offer the lettings book to a direct competitor who is already operating in the area. However, once you factor in the cost of disposing of the premises and making the staff redundant, it might be actually better to sell the business for a lower price as a going concern. Another factor to consider here is the risk of letting a direct competitor knows that you are selling.

One other important factor to consider is tax. Most buyers will want to buy the assets of your business, not the limited company as this is usually more tax-efficient for them. It will also reduce the transaction costs for both
sides. However, you will pay a much higher rate of tax on an asset sale. You therefore need to do your sums very carefully before deciding which the best option is.

Once you have decided whether to offer the business for sale as a whole or in parts and whether to offer the shares or the assets, you need to set a realistic guide price. Just as when selling a house, if you overcook it, you run the risk of having to go back to prospective buyers later at a reduced price and this will put you at a great disadvantage.

I usually value a business using three different formulae; a percentage of the turnover, a percentage of the profit and the asset value. In addition to ensuring that the price is right, this process also tells me whether the business is best offered for break-up or as a going concern.

Finally, you need to decide how many prospective buyers to approach though occasionally the best price is achieved by offering the business to one carefully targeted buyer at a premium price. But in the vast majority of cases, the way to achieve the best price is to invite a number of buyers to compete to buy the business.

Confidentiality

If word gets out that a business is being sold, it can do the most enormous harm. Your staff will be unsettled and may leave and your competitors may start approaching your landlords and vendors. For this reason, estate agency businesses should never be advertised openly for sale and all interested parties must be carefully screened and asked to sign a non-disclosure agreement before they even find out the areas in which you operate.

Your last declared profit will be an important factor in determining the sale price of your business.

Buying a business

Letting businesses are usually valued on turnover and sell for much higher prices than sales businesses. The reason for this is that lettings income is much more stable and predictable. The prices of letting businesses vary hugely but generally speaking you get what you pay for. Cheap businesses might deal with most of their landlords on a let-only basis, might have a high percentage of housing benefit tenancies or might have compliance problems.

Good quality managed businesses might seem expensive but the test is whether you could acquire the same level of turnover more cheaply by building a business from scratch. Most firms cannot which is why good businesses sell for such high prices.

The value of a residential sales business is much harder to determine. It will depend on the time that the business has been established, its reputation, the quality of the staff and the consistency of the profits that have been generated over many years. As a rule of thumb guide, a sales business will sell for 30 to 50 per cent of the value of a lettings business with the same turnover.

Compliance

If I could give just one word of advice to business buyers, that word would be “compliance”. When you buy a business, you take on responsibility for all its liabilities and a badly run business could very easily have hidden liabilities that exceed its purchase price several times over. It is therefore absolutely essential to employ a solicitor, an accountant and a compliance expert with specialist knowledge of the property sector to ensure that you are not caught out.

Adam Walker is a management consultant and business transfer agent who has specialised in the property sector for 25 years.
www.adamjwalker.co.uk