
Company sales - A whistlestop tour of the terminology - Ad Valorem
5 minutes
The pandemic lead to a number of business owners revaluating their priorities and as a result there has been a significant uptake in the number of business sales.
Selling your business can be a daunting process, especially as most business owners have never been through the process before. In this blog we explore some key terminology and things to be aware of.
EBITDA
EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortisation. EBITDA is a metric which is used to assess the performance of a business and is one of the first things that someone will look at when valuing a business.
Typically, a business is valued on a multiple of its EBITDA. The multiple varies depending on the industry the business operates in and the business’s size.
An EBITDA is often calculated over a two or three year period, as such if you are looking to sell in the next few years it is worth keeping an eye on your EBITDA and seeing whether there are any ways to increase your EBITDA in order to maximise your company value prior to a sale.
Due Diligence
Due diligence is arguably one of the biggest areas of concern for anyone selling their business as business owners often feel like they are being put under a microscope. However, due diligence is not something to be afraid of provided the business owner knows what to expect and is properly prepared for it.
Due diligence refers to the process where a buyer asks questions and performs checks on the business to ensure that the business is operating as it should and that there is nothing they should be aware of. Commonly due diligence involves confirming that the company’s records are up to date, that their returns have been filed on time and that the company has received professional advice and clearances where required.
It is worth noting that, should the purchaser uncover something they are not comfortable with as part of the due diligence, they may require the seller to agree to cover any costs that may arise as a result of it, use the issue to reduce the sales price or, at worst, may refuse to purchase the company.
Proper support from the business owner’s accountant or professional advisor is imperative throughout the due diligence process to ensure that the process runs smoothly and to provide explanations of the business’s financials where required.
Share sale vs asset sale
One of the first parts of any negotiation is whether the sale will be an asset sale or a share sale. In a share sale, the business owner sells the shares in the business whereas in an asset sale, the company sells its assets, such as its plant and machinery, to the buyer.
Typically, the seller would prefer to sell their shares as this will prevent a double charge to tax (as the company will pay corporation tax on the sale of its assets and then the individual will pay income tax or capital gains tax when extracting those profits from the company). However, a buyer would normally prefer to purchase the assets of the company as they will not be purchasing the history of the company and they may be able to get tax relief on the assets purchased.
The structure of the sale often comes down to negotiations between both parties, however, if the buyer is insisting on an asset sale, the seller may wish to push for a higher sales price in order to counteract the double charge to tax.
Earn-out
The vast majority of company sales involve an “earn-out”. An earn-out is essentially where the buyer pays for the shares as an initial payment along with further payments over a period of time. Typically an earn-out period is two to three years but could be longer or shorter depending on the requirements of both parties.
Earn-out periods often also include hurdle values. For example, a business owner may receive £100,00 as an initial payment with a further £10,000 if a certain turnover or EBITDA target is hit within a year of the sale and a further £10,000 if a further target is hit within two years of the sale.
These earn-out hurdles are often put in by the purchaser in order to protect themselves in case the business suffers a downturn or is not as profitable as initially thought. The buyer should be aware prior to selling the company, that the company may not hit the target and as a result they may not receive as much as they were expecting. As such, they may wish to remain within the business during the earnout period or may wish to negotiate on the hurdles and earn-out period.
How can Ad Valorem help?
The team at Ad Valorem have a wide range of expertise to support in all aspects of the sale such as by providing:
- Valuations of the business along with details on the EBITDA in order to ensure you receive the best possible sales price
- Assisting with preparing your business for sale, such as restructuring the business or providing a “mock” due diligence to identify any potential issues which could arise during a due diligence, giving you an opportunity to address these issues before they have an impact on your sale.
- Calculations of the tax due on the sale and identifying opportunities for tax planning
(E) enquiries@advaloremgroup.uk (T) 01908 219100 (W) advaloremgroup.uk