Chris Thompson: Key considerations for business owners in advance of selling their company
With the covid pandemic causing a shift in construction market dynamics towards an increase in consolidation in the sector, Chris Thompson of AAB discusses how business owners can prepare to sell their business to get the best deal possible in terms of after-tax proceeds.
Following significant disruption to the UK construction sector throughout the Covid pandemic, demand for construction is on the rise driven by large new infrastructure projects, housebuilding and an increase in home improvements.
This increase in demand comes at a time when there is a shortage in skilled workers and key building materials, creating issues for smaller companies that lack visibility of medium to long term demand.
Given these market dynamics, we expect to see an increase in consolidation in the sector, with larger acquirers purchasing smaller companies to expand services and offerings, drive cost synergies and buying power and boost revenues.
A key driver for buyers will be to acquire innovative businesses with a focus on new materials with a lower carbon footprint, and tech-enabled companies who have invested in the technology and digitisation of processes.
Most business owners rarely plan for a sale with serious consideration, typically only crystallising then an approach is made, or the owners near retirement age, or perhaps have a shift in their life objectives. With many owners likely having to invest significant hands-on time in their businesses to guide them through an extremely difficult past 18 months, their companies are unlikely to be in ‘oven ready’ condition should a potential acquirer approach them.
In addition, most business owners typically only sell a business once, and therefore do not always appreciate the complexities or pitfalls of this important process. After all, they want to get the best deal possible to recognise their efforts and be suitably rewarded in terms of after-tax proceeds.
The most effective action a business owner can take to increase the interest in their company as well as drive value higher, is to prepare both themselves and the business well in advance of a potential sale process beginning or entering into negotiations with an interested purchaser.
Business owners in the construction sector considering a future sale should consider the following key points:
- Sustainability - with significant focus on a ‘green’ recovery from Covid and the Scottish Government’s target to reach net zero by 2045, construction companies will need to consider the environmental impact when sourcing materials, as well as optimising manufacturing to become more sustainable. Companies with a focus on sustainable practices will not only future-proof their business but will also improve how attractive they are to potential acquirers.
- Technology and innovation – integration of digital tools has the potential to unlock value throughout the construction lifecycle, transforming interactions for buying and selling goods across the supply chain while also improving on-site collaboration. Construction companies should look to embrace innovation and technological advances in equipment and facilities to drive efficiencies, become more agile and react quickly to industry dynamics.
- Financial health check - a financial health check is advisable on any key risk areas ahead of a due diligence process. Each business will have its own unique considerations with industry and tax compliance key areas of focus for any potential purchaser. For example, this could include assessing whether the correct treatment of VAT reverse charge on supplies of building and construction services has been applied, or whether furlough claims have been administered and recorded correctly.
- Management Succession - reducing dependency on the owner or retiring management team, can result in a more valuable business to the purchaser and shorten the required handover period post-sale. It is important to have a motivated, reliable, and robust management team that can carry the business on if the vendor wishes a “’clean’ exit or short handover period.
- Tax planning – efficient tax planning can result in increasing after tax sales proceeds. This is challenging to do immediately before or during a sale process, so it is vitally important to consider options as far in advance as possible. Calls to align Capital Gains Tax rates closer to Income Tax rates and scrapping of Business Asset Disposal Relief have long been muted, and with the Autumn Budget on 27 October 2021 fast approaching, there could be significant increases in tax on business disposals. It is important that advice from a tax advisor with transaction experience is sought in advance of a potential sale of the business.
- Reporting - implementing or improving the effectiveness of management accounting and Key Performance Indicator (KPI) reporting will provide the vendor and the purchaser timely visibility of current performance and assist in making the due diligence process smoother and potentially less time consuming as the demand for real-time and accurate information is crucial to this stage of the process. The increase in cloud accounting packages offers an excellent option for many small to medium-sized businesses in facilitating this.
This is a selection of areas which we are currently discussing with businesses in the construction sector and encouraging them to consider in advance of a potential sale. Investing time well in advance of looking to sell a business can increase the value and after-tax proceeds, reduce the handover period for the vendor post-sale, and importantly, facilitate an efficient and effective sales process.
- Chris Thompson is a corporate finance senior manager at Anderson Anderson & Brown (AAB)