Darren Hurdle, Kreston Reeves, assesses what residential developers need to keep in mind, should they be considering selling their business.
The best time to sell a business is when it can achieve the highest price, and that is usually driven by a successful trading record, increasing profits and the potential for future growth. It is a process that ideally should not be rushed, starting two to three years before the preferred exit.
And given that it can take up to 12 months to complete a sale and that the acquiring developer may well ask you to manage an orderly handover of the business over a six to 12-month window, that leaves just 12 months to get the business into sale shape.
A pre-sale tidy-up will include looking at the following:
• Ensuring any customer and supplier contracts are up to date;
• Ensuring employees all have contracts and that there are no outstanding employment issues;
• Resolving any legal or HMRC issues;
• Ensuring costs are under control to maximise profitability;
• Ensuring financial information and management accounts are up to date and will stand up to scrutiny;
• Reducing, where possible, working capital requirements; and
• Extracting surplus assets from the business.
Residential developers will need to consider further issues unique to the sector. These include:
• Work in progress. Selling the business where a number of projects are ongoing can make it more attractive to buyers, although the ability to transfer development to a new owner needs to be ensured;
• Land banks;
• Warranty issues and potential liabilities;
• CIS registration and HMRC approval;
• Government initiatives, such as Help to Buy, and the availability of mortgages for customers;
• And of course, the wider housing market and interest rates.
Sale options will typically be a trade sale to a competitor, a management buy-out, a sale to an institutional investor, or a recapitalisation that allows for the business owner to take out part of their equity but retaining a stake and role in the management of the business. For larger businesses a flotation on the stock market is also an option.
Finding a buyer is not always straightforward and it is advisable to seek the help of specialist corporate finance advisers. They will look at and advise on the best approach and options to secure the highest value. They will work on your behalf to find suitable buyers, and once a buyer has been found manage the sale through negotiations, due diligence and legal documentation through to final completion.
Occasionally a sale can collapse, even very late in the process. Understanding the reasons why a sale can fall through and, where possible, addressing them in advance can help prevent a failed deal. Reasons include issues that arise via the due diligence stage, financial position not being what was previously advised, the risk of losing key staff, adverse changes to the wider economy and unrealistic vendor expectations.
The final thing a business owner needs to consider is to structure the sale in the most tax efficient way, taking advantage of any available tax reliefs. Given that sale proceeds are likely to be a business owner’s pension fund, taking professional finance advice is critical.