Today's podcast is about A need to know about selling your business. For many of us selling our business at some point in the future could be us cashing in our pension scheme. It may be a way that we can set up while we're at the top, move on for other different challenges in our life.

In this podcast we are going to look at

What we are selling

The choices between selling the assets in your business or the shares

• Figuring out how much your business is worth.
• Goodwill. What exactly is that? And does badwill exist? spoiler alert, it does!
• Options to sell

Options when you sell your business.

You either sell the shares that you own in that business

Sell the underlying trade of the business or the assets.

How do you choose which one? Well there are several things to consider, not just tax and how much money you get.

Listen to find out more

Valuation and Goodwill

How do you come up with a number, a value for your business? Goodwill plays a big part. Goodwill is what you are buying - Badwill also exists

The money you want, and what you get may not be the same. One thing you need to do is to come up with a value. Psychology also plays a part.

Listen to find out more

Planning points and due diligence

Let’s talk about both buyer and seller

You can’t get away from tax, tax planners step forward.

Due diligence, being careful and grown is about reducing the risk of things going wrong.  Make sure that you're not picking up a hot potato, and you're very conscious of what you're buying into.

Listen to find out more

Seek help

Make sure that when you're selling, your business you seek professional help, I don’t mean the medical kind! Professional people, like accountants and lawyers need to play their part. They will help you come up with the right numbers, and make sure you get the protection you need. This podcast is A need to know about Selling your Business

In This Episode

• Understanding the options available when you sell your business
• Appreciate the reasons a buyer wants to buy
• What Goodwill is
• Learn more about the things to consider when selling your business
• Developing your own Numbers confidence and decisions
• Take more control of your numbers to help make you money, survive and thrive

Links

https://podcasts.apple.com/podcast/proactiveresolutionss-podcast/id1500471288

https://play.google.com/music/m/I3pvpztpjvjw6yrw2kctmtyckam?t=I_Hate_Numbers

https://open.spotify.com/show/5lKjqgbYaxnIAoTeK0zins

https://www.stitcher.com/podcast/proactiveresolutionss-podcast

https://tunein.com/podcasts/Business–Economics-Podcasts/I-Hate-Numbers-p1298505/

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks, and welcome to episode 37 of I Hate Numbers, the show that has a mission to improve your money mindset, to help you make more profit in your business, make sure you pay yourself a decent level of money, have fun, enjoy it, and prosper. My name is Mahmood, and this is episode 37 of I Hate Numbers, and in today's podcast, I want to talk about selling your business.

For many of us, selling our business at some point in the future is either part of a pension scheme, it may be a way that we can sell up while we're at the top, move on to other different challenges in our life. What I want to look at today is selling a business, more particularly the choices that come down.

Do you sell the assets in your business or do you sell the shares in your business? We're going to look at how we come up with a magic number for what our business is worth. We're going to look at something called goodwill. What exactly is that? And just to let you know, by the way, badwill does actually exist as well.

And we're going to round up with some general tips for both the seller and the potential buyer. Let's crack on with the broadcast. Now, the first consideration when you are selling your business and by selling your business, I'm referring to your limited company. When you sell your company, you've got two options.

You either sell the shares that you own in that business, or you can sell the underlying trade of the business or the assets, and there are merits and drawbacks in either option. As a summary, if you sell the shares in your business, what that means is for the shareholder, you as the owner, in full or in part, potentially you generate a capital gain for your shares, or it may be that you actually generate a capital loss if you originally acquired the shares from somebody else.

That may or may not be a good thing, and again, we'll explore that later on in the podcast. When we look at an asset-sale, this is where you are selling the underlying trade in the company, selling the assets in the company. What that means is the seller is left with the company i.e you, so that company still exists.

There's effectively nothing there left, and the company itself would've made a capital gain on that transaction. Your company, let's call it Mahmood Reza Limited, will pay company tax on the proceeds, and you may have some losses that you've had in the prior year. So, a combination of tax considerations come into the form.

The next thing I want to actually look at is this magic idea of how do I actually come up with a magic number of value for my business? Now, valuation is not a science. All valuation models can do, all valuation of produce can do is come up with a figure or a range of numbers, and for me, it tends to come down to the psychology of events.

How desperately are you to move on in your business, in your life, and how desperately does the buyer wish to buy your company? We can certainly establish parameters. We can certainly establish minimum and maximum values, but ultimately it comes down to part-psychology, and here's the consideration for the actual buyer.

When we have a business, we have two options. We either grow our business organically, so we start from scratch, build up the customer trade, develop our marketplaces, we learn, we make mistakes, we make improvements. And that may be an option for a particular buyer. Now, one of the drawbacks of organic growth is it takes time.

It takes time to build up customer's confidence in what you're offering. It takes time for customers to trust us. We tend to invest a lot of money in the start of our business journey until that starts generating some income coming back in. Now, it may be that the buyer doesn't have that time. It may be that the buyer has got bigger plans and wishes to grow their own business empire much more rapidly, and therefore, what they will do, they will seek to buy that growth by buying another company.

Buying you may represent an addition to their stable. It may give them additional distribution channels to what they're already selling. It may mean they get economies of scale, which is a posh way of saying that if they've got a larger business arena, their existing cost structure, they can spread amongst a larger base and they can make some savings by having a larger base.

It may be they even see you as the competition, and therefore, by buying you, they can eliminate that element of competition. But ultimately, it represents a lot of opportunities for the buyer as well as for you as the seller who can actually move on. Let's focus particularly now about how we come up

with a figure. Now, the start point for me is to come up with what I call a minimum valuation. So, if you imagine your business and you write down all the assets that it has. So, it could be some equipment. You might have some property that you own. You might have some intellectual property that you've built up.

You might have some land. And what you want to do is to actually come up with the value for those items and what they would be if you had effectively a fire sale. If you sold them, what would be the values? If you've got things like land, if you've got things like property there, it may be the values that are recorded in your accounts are quite old, so therefore you need to get an up-to-date market value.

Typically, checking out a surveyor, a valuer will help you with that exercise. So, on one side of the seesaw, you've got the value of all the assets that you've got in your business. What you need to then figure out is what are the debts that you also have in your business. So, are there any monies owed on loans,

on mortgages, monies owed to suppliers? Perhaps there's your own director's loan account that hasn't been settled. You know, are there any other outstanding debts? And what we're saying is if we broke the business up tomorrow, we managed to get money for all the assets that we own at the value we could realise them for, pay off the debts, what would be the value left over?

Hopefully, it's a positive number and that's the minimum valuation for the business. Now, there's a little bit more that goes on top of that. A potential buyer is not just looking to buy the physical raw assets. That's the minimum you can get for your business. What they're looking to do is to perhaps get access to bigger markets, get access to a distribution channel.

They may see that you've already built up a customer base and they think they can come in and improve that. They may actually get a route to market much more quickly than they would do if they started from scratch. So, what you are looking for is to have a number, which is effectively the goodwill, over on top of the value of your existing assets.

Now, here's where the challenges come up, and this is where the difficulty comes in. You may see Dave down the pub, you may see Mr. Google come up with different formulae, and that's certainly quite true, but actually there's a bit of an art to how we come up with goodwill. Let me give you a few examples.

If your business is what they call a professional practice, it could be a firm of accountants, a firm of lawyers, the typical thing in the trade is to look at your fee income and apply a typical multiple. It could be one to one and a half times the value of your turnover. If you are a hotel, a hospitality business, then it will take into account how many rooms you've got to let. If you are a restaurant, how many covers that you've got.

But ultimately what we are looking to do is to come up with the value for the profitability that could be generated over a future period. We will consider things like what's the earnings growth been like so far? What are the potential efficiencies? Because what the potential buyer is looking to access is that future profitability in your business.

Now, I said at the beginning you could have badwill, and that could be that your business is in such a state that you've got an immense amount of debt. The business has been suffering. It doesn't mean there's no intrinsic value because you could have a supplier base, a customer base, which is quite

profitable, quite attractive proposition for a buyer, and therefore they'll take that into account. So, be prepared and I would strongly recommend that you need to make sure you get good advice, a good competent person to help come up with the value of your business. Unfortunately, in my 25 years plus business career, I've seen many, many businesses overbuy for goodwill.

They haven't necessarily done what I call due diligence and they've tended to pay more than they should do for the goodwill. Conversely, I've seen also businesses being undervalued because they've not actually taken this account, what that opportunity is worth to a prospective buyer. But certainly, come up with that goodwill value.

Now, I want to round up by giving you some planning points for both the seller and also for the buyer. We've talked so far about selling assets or shares. Tax considerations are certainly part of the equation. So, if you sell shares, then you tend to potentially apply for favorable tax relief such as Entrepreneurs’ Relief, something that's a bit of a mouthful called substantial shareholding exemptions as well, which typically goes for trading companies.

Those companies which are investment companies like property-owning companies, unfortunately don't get to benefit from these wonderful relieves. Also, if you're a shareholder selling shares, you also get a tax relief from annual exemption, which reduces some of the tax exposure that you may have. Now, from a seller's point of view,

effectively, apart from the potential favorable tax treatments that come, it may not be that attractive for a buyer, and a buyer will be weighing up two things. If they do buy your shares, what that means is if your business has built up losses over a period of time, that buyer can use those losses if they are certainly very positive and have got strong hopes to turn the company around and to build on it.

And if that happens, all those losses that have been built up they can use to reduce any future tax bill. They can use that for some good effective tax planning. The downside of buying shares in a company is that you also take over the responsibilities of that company. So, if the company's been a bit naughty, so if you haven't kept up with your tax obligations, if you've got issues bubbling under the surface, what will happen is that the buyer will step into your shoes and take over those responsibilities.

So, some buyers may be a bit reluctant. The level of due diligence is much higher, and due diligence makes sure that you're not picking up a hot potato and you are very, very conscious of what you're buying into. And it tends to be a lot more work involved, and that will also mean a lot more time and also mean the fees will be higher that you're paying to all the professions that are involved in that transaction.

However, it may be that asset purchases are preferred for a buyer because they can claim allowances of those assets. They can actually get tax relief pretty quickly, and therefore that's a very positive motivation for them to buy the underlying assets. If the assets are acquired, typically what would happen, that would be hived off into a new company.

A new company will be created and the trade will be transferred. If that happens, then obviously that would mean, you as a selling company, will be paying tax on that transfer. So, let me just summarise what we've been talking about, folks. First of all, I've emphasised, and I'm obviously slightly biased here, make sure that when you're involved in this selling your business, it's advisable to seek professional help in terms of accountants, in terms of lawyers,

in terms of making sure the due diligence is done. Think about what you are selling. Think about what's going to be the most advantageous for you in terms of selling shares or the assets. Think about the potential tax implications. And by the way, folks, if you are the buyer, then the same rationale applies to you.

Make sure you get advice. Make sure you look to what you're buying, and then what you need to do is to arrive at a value. Typically, values will be a start point of the conversation. You need to think carefully as the seller. What is it that the opportunity is that you are presenting to the buyer? And likewise, the buyer will do the same thing.

I hope you found this useful, folks. I'd love it if you could obviously share the podcast with your friends, your families, and your colleagues. If you've got any feedback to share, I'd love to hear what it would be. If you've got any recommendations on things you'd like to hear on future episodes, by all means tell me.

But for this, have a fantastic week. Check out the show notes at the end of the podcast. And I wish you best luck in your future business journeys. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode.

We look forward to you joining us next week for another I Hate Numbers episode.