Finding your way to the exit: preparing the agency for sale
We all know what it's like in our personal lives, when small but fiddly jobs get put off. Someone should take a look at that damp patch on the ceiling. Maybe I should get a will. I really ought to cancel that expensive gym membership I never use.
Matthew Rowbotham: senior associate in the corporate team at Lewis Silkin LLP
The examples might vary, but the lesson is the same. Most of us have a tendency to react to what is in front of us rather than planning for the longer term.
The same lessons translate to the reality of running an agency. It can seem all-consuming and leave little time to think about the next stage. For many younger agencies, a sale could be the way forward. Teaming up with a bigger network could be just what your business needs, and a bit more cash in your pocket likely wouldn’t be unwelcome either.
But you need to get there first. Here are some essential questions that agencies thinking about a sale should ask themselves. Rest assured that these issues are all a lot easier to sort out before you start negotiating sale terms.
Who should be part of any future sale?
This point is crucial to getting your senior team to pull in the same direction. If they already have shares or share options in the company, then that helps to align their interests with yours.
One big advantage of an equity scheme is that it is often more tax-efficient than a cash bonus. Cash bonuses are currently subject to income tax / employee national insurance contributions at up to 47% with employer national insurance contributions of 13.8%.
There are numerous kinds of equity incentive, but the best kind of statutory share plan (Enterprise Management Incentive options) can lead to growth in share value being subject to an effective negative tax rate. This is because the corporation tax relief available to the company when the option is exercised can exceed the capital gains tax payable by the employee on sale.
The very worst possible outcome, which is all too common, is when the founder gives a vague promise to do right by someone ("We’ll do the option paperwork soon, don’t worry"). Most shares incentives will be more tax-effective if entered into at an early stage, when the company’s value is low. Leave it too late, and you’re in no better position than with a cash bonus.
Belated attempts to fix the problem can be very expensive, and leave the senior management looking divided and distracted at a time when they are under most scrutiny.
Who should not be part of any future deal?
Retired founders, consultants who got shares when the company was strapped for cash, ex-employees. It is very easy for a company to accumulate shareholders. If they don’t play a major role in the business now, and if cash isn’t the problem it once was, do you really want them sharing in the future growth of the business and complicating the sale process?
It may make good commercial sense to try to buy them out sooner rather than later. If your company buys back the shares then, unless certain conditions are met, the shareholder is taxed as if they are receiving a dividend (effective tax rate of up to 30.6%).
Explore the alternatives: if another shareholder buys them out, it may be possible for the proceeds to be taxed at only 10% with the benefit of entrepreneurs’ relief. The lower the tax bill, the more room there is to cut a deal.
Where is the real value?
If your business is dependent on a small number of contracts or assets, those deserve special attention. Get your key contracts reviewed to make sure that they are robust, and preferably in writing! Similarly, do an audit of your intellectual property (both for your own brand, and the IP you deal with for clients). If you have been assigning or licensing IP to clients, ensure you have the legal right to do so.
What sort of package are you selling?
The easier it is to understand your business, the more likely you are to attract buyers. If your business has always been run out of a single trading company, count yourself lucky. Many businesses grow organically, and without much advance thinking.
Often the shareholders will hold two different companies separately for historic reasons. If it’s going to be sold as one business then make sure it looks like one business. Consider merging the two companies, or at least putting them in a corporate group.
As well as being easier to sell, this could allow easier pooling of resources and greater tax efficiencies (by off-setting tax losses in one company against taxable profits of another).
Your structure may also have been complicated by historic tax planning (e.g. limited liability partnership structures). The latest Budget eliminated a lot of the tax advantages of these structures, so consider whether your structure still works.
What should not be sold?
A lot of random assets, not directly related to the business, can end up in trading companies. The reasons for these arrangements vary, but the conclusion is often the same: get them out of there! Sometimes a buyer will not want to be lumbered with a complicated and expensive asset (e.g. private jets or hobby businesses) or the seller might not want to lose control of the asset (e.g. sporting season tickets).
Even if your business is performing well, it is all too common for legal niggles to come out of the woodwork during deal negotiations. This leads to a more protracted sale process…and the very real risk of deal fatigue.
Get into the mindset of your prospective buyer. What will they take an interest in? What will put them off? That perspective might force you to address some annoying (or worse) issues early on, but ultimately it will make for a smoother, and hopefully more lucrative, deal.
Matthew Rowbotham is a senior associate in the corporate team at Lewis Silkin LLP, who specialises in tax and incentives.
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