PRIME business club

Plans to deal with pension shortfalls by encouraging people to work for longer received a dash of cold water today. Three-quarters of us could be too ill to work, Professor Sir Michael Marmot of University College London warns in a new report.

All but the richest Britons suffer years of ill health. People in the richest neighbourhoods in England live seven years longer than in the poorest, and enjoy an extra 17 years of good health.

Even if you exclude the poorest five per cent and the richest five per cent the gap in life expectancy between those in low and high income places is still six years, and in disability-free life expectancy 13 years.

Much more needs to be done to address health inequalities if raising the retirement age to 68 is really to mean people remaining active and working for longer, the report warns.

The report is not the work of some maverick outfit, but the final paper from the Marmot Commission - set up in 2008 at the request of the Secretary of State for Health. The Commission, chaired by Sir Michael Marmot, was tasked with finding the most effective strategies to reducing health inequalities in the country.

Fair Society, Healthy Lives (The Marmot Review)

Coverage at Times Online

Nice picture of marmot (a kind of groundhog) sitting on rock.

Here’s a list of some common questions you are likely to be asked when the time comes to sell your business. You really need to start considering these questions long before the sales process starts - sometimes years in advance, so you have fixed the problems as far as possible. That way the sale will go more smoothly.

Selling a business is similar to selling a house or car, with the buyer (or professionals acting for the buyer) trying to uncover any serious problems - but also hunting for weaknesses that could lower the price. This process is called due diligence.

The seller meanwhile has to spend a lot of time answering what are sometimes tedious questions - but at the same time this is an opportunity to confirm what the business is worth.

For small businesses the buyer may decide not to hire professionals to do due diligence on their behalf, but may do it themselves. Though this may make the process much more informal, you should still take it very seriously.

There are more notes about how to approach due diligence below the list.

Top questions to expect

1. Why do you want to sell the business?

Retirement, ill-health, even boredom are all common replies, as is the desire to raise money for a new business venture or to buy property. This question may also be an indirect way of asking whether the business is in any difficulty - see question 3 below.

2. What are your own plans after the sale?

If you wish to retain a role in the business - as consultant, employee or part-owner say, this needs to be thoroughly clarified, written down and agreed.

They may also be checking whether there is any chance of you competing with them in the future. If this become an issue it may be worth negotiating an explicit no-compete clause that meets both sides’ needs.

3. What difficulties does the business face?

This is one of those open-ended killer questions. Preparing a SWOT analysis beforehand may help suggests topics you’d be comfortable talking about. Your aim is to be honest without reducing the price to an unwarranted extent. You are under no obligation to provide free consultancy advice to the next owner, but you should reveal material facts. If there are serious issues confronting your business - particularly ones affecting its future viability, discuss what you have to reveal with a suitably qualified professional advisor.

4. What exactly is included in the sale?

This question may come up several times so it is best to give a fully comprehensive answer from the outset. The buyer may seek clarification as they look over your premises or become aware of different aspects of your operation. For example, if you are a designer, what about the intellectual property in past designs? What about the use of your name?

5. Can I see the books?

This means you have to have the accounts in a fit state to show. They need to go back at least three years.

6. Are these the same accounts you’ve shown Her Majesty’s Revenue & Customs?

Let’s hope the answer is yes!

7. Have you any charts or simple figures that summarise how the business is performing at a glance?

The buyer is likely to be interested in things that give an immediate idea of the health of the business without having to wade through the accounts, such as the trend in sales or net profit. Presenting them clearly is useful as part of your sales pitch, but remember they become part of the sales documentation and must be true.

Key performance indicators relevant to your own particular line of work that might not be in the accounts are also relevant - for example the occupancy rate for a hotel or care home, or the breakdown of sales by product line over time.

8. Are there any big debts?

They’ll be looking particularly for overdue debts from customers that might need to be written off, but also the level of debt your business typically carries.

Strictly speaking in accounting terms debts are your current liabilities, which includes things like any lease or service agreements you are committed to. These can affect the sale price if they are hefty items.

Outstanding debtors (unpaid invoices on the sales ledger) are classed as assets. What the buyer will be checking is whether they are really assets, or likely to turn into unpaid bad debts that have to be written off.

9. Are you up to date with your own payments?

For key items such as rent, loan repayments, income tax, VAT if you are registered, corporation tax if the business is a limited company, PAYE if your business has employees.

10. Have you any employees and how are they paid?

The answer needs to include full-time, temp and unpaid staff. The buyer may also be checking there are no illegal or off-the-books payments.

11. Are you involved in any legal disputes?

For example, with suppliers, trading standards or the tax authorities - or former partners or staff.

12. Are there any major items of expenditure due soon?

The buyer is on the lookout for things like the renewal of key equipment, major maintenance or a lease expiring. Though a good answer to this question is generally no, because you have taken care of such things while preparing the business for sale, there is one pitfall to beware of.

If you spend heavily in the run up to the sale, there’s a risk the buyer may not value what you’ve done because they have other plans. This is another instance where there is a strong similarity between selling a business and selling a house - new garden decking won’t lift the value if the new purchaser wants to rip it out and use the space for a pond. So keep the focus on essential items for the core business you think all buyers will be interested in.

For other items honestly stating what needs renewal and accepting that this may lower the price may be cheaper for you than renewing it yourself and still having to accept a lower price - because the buyer turns out to have other taste or plans.

13. How did you arrive at the asking price for your business?

Ultimately your business is worth what someone is willing to pay for it, so how you have arrived at your valuation is strictly speaking completely irrelevant. You need to decide whether it is in your interests to talk about it.

Sometimes it is, if going through the assets, goodwill, future earnings potential and so on will whet their appetite and encourage them to pay more.

But on other occasions this discussion just invites them to negotiate you down on each element. In this case a better tactic might be to decline going into detail about your own thought processes. Just assert that that’s the price at which you are willing to sell.

Your other answers, particularly to questions 1 and 3, may be relevant to what line you can plausibly take.

14. What element of goodwill is build into the asking price?

This is another way of asking you to justify the price. If you choose to answer you would need to say firstly what the business is worth without goodwill (that is with just the value of tangible assets and order book). Then you’d need to give some reason to back up the extra value that goodwill (in other words intangible things like a good reputation and happy customers) adds to your business.

With some businesses everyone will accept that goodwill is a key part of the business being sold, so you would devote attention to it in your pitch. This might be the case for businesses where trust, repeat business or word-of-mouth recommendation is very important, for example private exam tuition, health spas, restaurants. With others it’s either hard to quantify or irrelevant because customers have little choice, like a tee-shirt concession at a music festival.

15. Have you got any happy customers who can supply testimonials?

You may have some you use for sales purposes that are already public. Think carefully before revealing more. You need to protect you customer list in case the sale doesn’t go through, as it may be one of you most valuable assets. On the other hand, the buyer needs to evaluate the quality of your customer list. They may also need reassurance that your business has a good reputation. So some give and take is necessary.

Another factor to bear in mind is the reactions of the customers themselves. If they get wind of a possible sale it may unsettle them and cause them to go elsewhere.

Why due diligence matters

Whatever it is called, answering a lot of questions is an essential part of selling a business. Both sides are likely to need many things clarified before they feel comfortable about going ahead.

It’s a good idea to keep copies of the answers you give. Confirm verbal answers immediately by letter or email. This is because if a dispute arises later - for example the purchaser attemps to get part of their money back because of a problem they claim you hid from them, you will be able to prove that they bought the business fully aware of the facts.

During due diligence it is important not to misrepresent the facts, as that could come back to hurt you later. Indeed the advantage of “full and fair disclosure”, if it is well documented, is that it can protect the seller in later disputes. Once a problem has been disclosed the buyer cannot use it to complain or seek compensation after the sale has gone through.

The importance of confidentiality

The one big difference between selling a business and selling a house or car is that confidentiality is much more important in the business case. There are many more people with a stake in the outcome, and customers, suppliers and staff can all be seriously alarmed if you reveal your plans too soon.

You should have an exit strategy for you business, but exactly when you reveal it to others is a critical part of a successful sale. So it is normal practice to keep discussions with potential buyers and their representatives quiet until the deal has been finalised, and to agree with them how it is made public.

Disclaimer: The opinions expressed are those of the author(s) and are not held by PRIME unless specifically stated. The material is for general information only and does not constitute legal, accounting, tax or other personalised advice. You should not rely on this information to make (or refrain from making) any decisions. It is not a substitute for independent, professional advice for your own particular situation.

Last week the basic state pension went up to £95.25 for a single person and £152.30 for a couple. This isn’t much, and the earliest you can get it is when you reach 65 if you’re a man (so you’d qualify if born on or before 5 April 1959) or 60 if you are a woman (born on or before 5 April 1950).

For these reasons people have been heavily encouraged to top up state provision with some private scheme. And people running their own businesses often invest in that with a view to selling it or some assets to fund retirement.

There’s an interesting article in the Observer about the pros and cons of different ways of saving for your retirement. Basically it’s saying private pension plans are not all they are cracked up to be, particularly because they are typically inflexible about when you can cash them in.

Taking control of investments yourself may be better than leaving it to a pension fund manager. Here’s an extract:

“For many years I have been very anti-pensions,” says Colin Jackson, an independent financial adviser and director at Baronworth. “Yes, you get tax relief on your contributions, which is a great incentive to invest, but when it is time to retire and the market is against you I think the technical term is: ‘You’re stuffed.’ ”

Jackson does have company pensions from over the years but says he is “bitterly disappointed” with their performance. He thinks property is a far better medium- to long-term investment, followed by Isas, with pensions at the bottom of the pile. He also says that people should look beyond residential to consider commercial property.

“Many years ago we decided to buy the building we work in,” he says. “That is now my pension.”

The article estimates that £100,000 invested in property 10 years ago would have turned into just under £221,000 now - even taking into account recent house price falls. Had that £100,000 been put into an average instant access savings account, it would have grown to £129,000 (not inflation adjusted), while it would have shrunk to a shocking £91,646 if it had been invested in an average UK-based equity fund.

More at Observer site

What can you do if you don’t have the money to invest in anything?

Well, working till you drop may be the only option.

If you can manage to keep working beyond state pension age it’s even possible to convert the pension you would have received into a lump sum for when you eventually do retire. You don’t lose out by continuing to work.

Here’s an example from the official Pension Service site, run by the Department for Work and Pensions.

Ahmed decides to put off claiming his weekly State Pension of £105 for three years. When he finally claims his State Pension, if he chooses a lump sum, he will get a lump sum of around £18,000 (before tax) as well as his normal weekly State Pension entitlement.

You can find out how much you could get by putting off claiming your own state pension by phoning the Pension Service’s Forecasting Team on 0845 3000 168

More than half of the visitors to this site taking part in a recent PRIME mini poll expect to sell their business as a going concern when they are ready to exit the business. A further 16 per cent also expect to keep it going, giving it to family or a friend.

Do you expect to eventually sell your business?

• 1. Yes - sell as a going concern 56% (49 votes)
• 2. No - will give away to family / friend retaining stake 15% (13 votes)
• 3. No - will give away to family / friend completely 1% (1 vote)
• 4. No - it will close but with sale of major assets 1% (1 vote)
• 5. No - it will close with sale of some minor assets 3% (3 votes)
• 6. No - it will close with nothing much to sell 22% (19 votes)
• 7. Other 2 2% (2 votes)

Source: visitors to www.primebusinessclub.com

About a quarter expect their business to close when they leave - and the great majority of these don’t expect to be able to make much from selling the assets.

So there is a clear split between those expecting to get extra money from the business when they exit and those who don’t. And this may be realistic - some businesses are worth something without the founder while for others the founder IS the business. The type of business is critical.

Where there may be some unfounded optimism is on how easy the business will be to sell. There does seem to be evidence that the size of the business is important here.

There is a well developed market for selling businesses over a certain size, with papers, notably Daltons Weekly carrying classified listing od businesses for sale, and specialist business transfer agents you can go to to help with a sale. But once you get below a value of about £250,000 for the business the market gets less interested, and the costs involved in selling start eating into the proceeds.

Related posts:

Tax bill for selling your business clarified

Exit strategy - a practical guide to selling your business

When Graham Watkins and his wife sold their company, they had no idea what would be involved. Now Graham, 53, has written a book recounting their experiences and the lessons learned. “It pays to start early”, says Graham. “The process was far more complex than we had imagined. It involved an enormous learning curve and could have easily ended in disaster.”

“Exit Strategy - a practical guide to selling your business” by Graham Watkins, is published in the UK on the 14th August, price £12.99. It’s available from Amazon. ISBN 1905108192..