Passing a family practice down to the next generation is not as simple as it sounds. Not only does the business have to be in good shape to survive, but it also requires a generation that is interested in it and which has the financial wherewithal to pay the retirees for what is effectively their nest egg.
Last month we looked at precisely that issue. But what happens if the practice has no family that may want to buy it? There is just one option – sell to a third party.
Dominic Watson, a consultant at broker Myers La Roche, says that ‘the reasons for practice sales are wide and varied. Sadly, many are negative – such as disputes between business partners, divorce, health issues and probate.’ But to this he adds that many owners find running an optical business stressful at times and an exit offers the hope of an easier life.
Selling up
Where a sale is on the cards, Nick Smith, a consultant with the Family Business Consultancy, has found that families often choose to sell to a buyer who they believe is most likely to preserve the culture and ethos of the family business; often another larger family owned company.
But once the decision has been taken, Sam Chaney, corporate partner at law firm VWV says the family should take advice on valuation and sale options: ‘This is one of the biggest decisions you will make in your business life and it is important to get good advice and be prepared to pay for it.’ She advises seeking recommendations but notes that the sort of advisers that will be engaged will be dictated by the size and complexity of the practice. Further, she says to ‘think hard about engaging people who work principally on a success fee percentage commission-only basis – the overall cost may be higher, although you may be insulating yourself from costs if a deal doesn’t go ahead, but there can be a conflict of interest for people remunerated only if a deal goes ahead.’
Watson, on the other hand, says to expect to pay a small up-front fee on engagement and then a percentage on the successful completion of a deal. He, however, warns against those who charge a levy if a practice has not sold and the owner wishes to exit their agency agreement. He adds: ‘Beware of brokers offering free valuations and then “valuing” at ridiculous prices to encourage practice owners to sign up. These firms are often looking for revenue from ongoing fees.’
As for choosing an advisor, Watson, understandably, recommends using a broker, and one that ‘does not simply offer a matching service; they should also act as market makers, negotiators, mediators and facilitators.’
He says the process should be controlled by the seller and negotiations take place in a friendly, but competitive environment: ‘Make sure that your broker – or whoever else you take advice from about the sale of your business – genuinely has your best interests at heart and is not going to gift wrap the sale of your practice to a favourite client.’
Back to the process, one step Chaney says will ease the process is to undertake some financial and legal due diligence as if the seller were a buyer, ‘to identify any gaps or issues that may affect price or saleability. Internal due diligence also means the practice is prepared for what the buyer’s lawyers will be asking for in due course.’
As for timing, the advice appears to be to commence formal exit planning two to five years prior to the anticipated sale date. But as Watson has experienced, markets do change and owners who start early often commission an exit planning review every two years to make sure they are working with fully up to date information. He adds that ‘in a rising market this is crucial.’
Seeking a valuation
Before a practice can be marketed, it will need a valuation which will generally be valued on one of three bases – the value of net assets plus a valuation of goodwill; a multiple of earnings; or discounted future cash flow.
As to options, Watson points out the obvious – that there is a spectrum of possible exit options: ‘Over the years I have been asked for my opinion on some truly weird and wonderful arrangements involving the sale of minority stake holdings internally with future options to purchase additional shares.’ But for ‘internal’ sales, management buyouts in a single transaction are most typical. By far the most common transaction, in Watson’s view, is an outright sale to a third party. He says payments are sometimes structured, but the vast majority of deals are full cash on completion for the full issued share capital.
Chaney thinks the same. She says: ‘The family will ideally want to be paid in cash, in full, at completion, rather than risk the possibility of deferred consideration not getting paid because the business gets into difficulties under its new owners, or a dispute arises over what should be paid.’ But that, she says, may not be possible and there may be many good reasons why the retiring shareholders keep an equity stake or agree to be paid over time or agree that some of what they get paid is subject to future performance. Even so, she suggests starting with the idea of the ‘clean break’ and working back from there if necessary.
Interestingly, Watson notes that approaches by venture capitalists and other non-optical sector businesses attracted by the margins within dispensing optics rarely ever come to fruition.
Going beyond the sale comes the problem of divvying up the proceeds. Is this to be done collectively through a family office or will each family member take their own share of the pot to do with as they want? The answer to this is open-ended but needs full debate.
Tax planning
As might be expected, tax planning is important and should always form part of the decision-making process but should never be the main driver. That said, no one wants to hand over, by way of inheritance tax, 40% of the value of what they have worked for.
This is why both Smith and Chaney consider tax planning as key. Smith says: ‘The most important point is what is right for the family members and the business itself.’ He believes the UK offers a fairly benign tax-planning environment for family businesses.
Chaney, however, notes that if Business Asset Disposal Relief, formerly Entrepreneur’s Relief, is available, the effective rate of Capital Gains Tax is just 10% up to a lifetime allowance of £1m.
In summary
The profession has a bright future that hopefully should encourage the younger generations to join. But if they do not then practice owners need think about their future and sell up noting that it takes time to lay the groundwork. Owners may feel invincible now, but old age and mortality awaits them all.