What is your Magic Number?

I KNOW MINE.  What’s yours?  £1m?  £5m?  More?  The magic number I mean is the sum of money you want (or need) to realise from the sale of your business.  It’s the starting point for exit planning and, if you are not the sole shareholder, is something you will need to agree with your fellow shareholders well ahead of any sale.  This may seem a very speedy task (most business owners think in multiples of £1m) but, depending on your particular circumstances, it can take longer than you think.

Some IFA’s have quite complex modelling techniques that calculate the amount of money you’re going to NEED to support your lifestyle (not forgetting your wonderful but costly dependants, of course).   This gives us a useful starting point.  However, IFA’s don’t always add in the cost of your “Wish List” – all those things you promised yourself you would do once you’re not working in the business every day.  And of course you’ll want a contingency fund for when life throws you a curved ball.

It might seem counter-intuitive, but the best way is to calculate the sum of money you will need, based on the above, and then work out a date by which you want to have left your business.  Sometimes that date is dictated by financial factors – perhaps because the business has had a particularly strong couple of years – but usually it’s a date that you as the business owner already have in the back of your mind, and it’s often age related.

That gives you a starting point for your exit plan. The next step is to get a current valuation (your Accountant or an Independent Valuer will often provide this as a free service).  If there’s a gap between the current value and your magic number (there usually is – and mostly the gap won’t be in your favour!) then you may decide that there’s no point in selling up (depending on your personal circumstances of course).  After all, unless you have no choice, there’s not much sense in selling if you’re not going to realise enough value to meet your future needs.

On the other hand if the gap is positive, then you will probably want to get some tax advice from your Accountants and Financial Advisers very quickly!

Whether the value gap is negative or positive, make sure you take advantage of any available tax benefits. There are often strict pre-conditions to be met with regard to claiming: for example Entrepreneurs Relief usually needs to be put in place well ahead of a sale – so it’s worth having a preliminary discussion with your tax advisers.

What you now have is a baseline from which to work out how you are going to make the business worth more. You might get there by organic growth or by acquiring another business. Each of these strategies has different risks, costs, rewards and timescales.

There are many growth to exit initiatives open to every business owner: too many to discuss here, but I will mention one strong rule-of-thumb:

The day you know that you can walk out of your business and never go back and your business will still run profitably, is the day your business is ready for sale

Because when you sell, one major change is you are not going to be there (certainly not running it). So bear in mind that if the business doesn’t run without you prior to sale, it’s going to worth less to a potential buyer.

Steve Barry 2Steve Barry is Associate Director for Evolution Complete Business Sales.

For advice and information on preparing a business for sale, please visit www.evolutioncbs.co.uk/resources or come along to a free Business Owners Masterclass.

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