Your IndustryMar 29 2012

When it’s time to move on

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As we get closer to 2013 there are hundreds of acquisition deals on offer from some pretty diverse businesses.

Suddenly everyone who is not selling is buying and understanding what is on offer is not always easy. There are really only two different types of transaction, let us call them a ‘company sale’ and a ‘business sale’. Understanding the difference (and which one you are trying to undertake) really helps everything else fall into place, so let us try and bust some myths and send you off in the right direction.

Company sale

A company sale is a transaction where the legal entity (body corporate) is acquired by the purchaser. That means all assets and liabilities are acquired and this could be a limited company or limited liability partnership. In a perfect world, every vendor would achieve this deal structure, as your post-transaction liabilities can be managed and the tax treatment frequently means a 10 per cent rate of tax on the consideration (subject to meeting all criteria for entrepreneurs’ relief). Valuations are usually based on a multiple of profitability (between six and eight has always been a good starting point), rather than an individual income stream and you should expect the due diligence process to be comprehensive. It is normal for a significant proportion of the consideration (third to a half) to be paid at completion and the balance is often supported by loan notes and/or shares of some description.

The typical cost of this deal (advisers, lawyers, accountants and so on) and the risk it represents to the purchaser (by taking on liability for all historic advice), mean it is generally only offered to businesses that can demonstrate sustained investment and a good return. It is hard to say exactly what that looks like but as an example, strong management, enduring relationships with quality clients, receiving a proposition that focuses on them and not just their money, delivered using a sound operating platform that drives productivity while getting the best out of staff and above all a pattern of consistent profitability – phew. For numbers, think £1m turnover, £200,000 profit and a value of £1.2m as the absolute minimum. These firms are often purchased by businesses in parallel sectors (investment managers, private banks and so on) or by national IFAs and/or consolidators looking for regional hubs to build on with further acquisitions.

Business sale