The Advantages of Deferred Consideration

by Paul Berry, UK Partner at Luminar International

It may appear to be a strange opening statement that actually business sellers may be better off agreeing to defer a portion of the value of their business on retirement, or deferred consideration. So how could anyone make such a statement?

Well for many the challenge is to maximise the value of their investment, often something that represents a lifetime’s work. For those coming up to retirement from business it is less the need for cash on day one, and more the need to ensure that total amount, when it comes, is as large as possible.

The main benefits of deferring a portion would be:

• Maximising price
• Leaving the business with a more sustainable funding structure going forward.
• The flexibility to pick a more advantageous time to convert the lump sum into an annuity
• The ability to plan taxes, treating the proceeds as Capital Gains using the increased entrepreneurs’ relief allowances.

In the past there have been two primary routes:

• To sell to a competitor or someone in the trade who have complimentary interests
• To sell to a investor, be this a private equity house, or a high net worth individual

The reality is that there are no simple solutions. Selling a business is not like selling a house, which has a pretty well trodden path. With a business its value is based primarily on what is likely to happen and less so on its past. Therefore it carries inherently more risk.

One way that people manage that risk is to be more cautious and demand a higher rate of return. This is fine if you have high growth rates; however, even the announced growth figures on 27th April 2011 for the UK economy show growth of 0.5%, which largely reflected a return following a poor Q4 2010. This year estimates are officially at a growth rate of 1.7%, with the unofficial consensus being closer to 1.4%. Some sectors will perform better than others, though it appears much more likely that the economy will carry on its uninspiring performance for the foreseeable future.

The difficulty is that with a background of low economic growth and an increase in the number of “Baby-Boomers” coming up to retirement, some of the performances and valuations of 3-4 years ago are unlikely to return. With this as a background, now is a good time to think about how to best realise probably your most valuable asset.

If you would like to investigate whether Luminar International may wish to buy your business, then contact us

Management Teams Join with Luminar International to Buy Businesses

More and more management teams are joining with Luminar International Partners to buy the businesses that they already work in and know so well. In buying the business from the retiring owner, the existing management team can enjoy benefits such as continuity of employment, involvement in strategic decision-making and of course wealth creation.

Luminar International is a private investment firm focused on buying businesses from genuine retiring business owners. Working closely with the incumbent management team, Luminar International will initiate a management involved buyout (MIBO™). The buyout team will comprise those key managers who are willing to participate plus one of the Partners from Luminar International. This style of transaction appeals to vendors who in the main are very enthusiastic about seeing the existing managers continue on and enter a new phase of ownership for the business.

From time to time the existing management team may need new skills or experience to continue running the business without the retiring vendor. Luminar International will be instrumental in evaluating the future requirements and bringing these to the business post-acquisition.

Luminar International has a unique way of buying businesses which relies on the existing management team to continue running the business post-acquisition. It is important to remain faithful to the people and culture that helped the business become successful in the first place.

If you would like to investigate whether Luminar International may wish to buy your business, then contact us.

Luminar International
http://www.luminarinternational.com/
info@luminarinternational.com

Setting Your Business Up For Sale

All business owners look ahead to the time when they retire and hope that they will sell their businesses swiftly, painlessly and, most importantly, profitably. After all, what’s the point in spending all the years of hard work, sleepless nights and making sacrifices building the business when you don’t get what you deserve?

In the current economic climate the press would tell us how hard the times are and that the future is far from bright and orange; whereas the governments are trying to assure us otherwise. Perhaps there is a good lesson to be drawn from the recession is that the strongest and well organised survives. If you are a business owner and managed to see your business through the recession, then huge congratulations to you! You have done well and far better than some of the banks and corporates world-wide.

However, regardless of who tells us what, we still hope that we will find that buyer who will make us happy and we won’t need to worry about a thing when we sell our businesses because we know that a) our business (that we worked long and hard for) is in good hands; and b) we get the price that we deserve for all the sacrifices that we’ve made over the years. We also hope that we sell the business whenever we like and without a glitch. Sadly, the reality is usually far from it. The world is overcrowded with organisations that are willing to “help” and promise retiring vendors the Earth and overvalue their business whilst waging a bidding war while we wait (for months and years) and pay tens of thousands of Dollars (Pounds, Euros and Yens) for the privilege.  However, most vendors are disappointed when they sell their businesses because they don’t get what they thought they would (or what they were promised).

The good news is that it doesn’t have to be this way! There are a few simple steps any business owner can take in good time to ensure that they exit their business comfortably:

1. Get an early business valuation done to identify an indicative price for your business and areas for improvement.
2. Build a strong management team.
3. Ensure that you have M&A (Mergers & Acquisitions) specialists (lawyers, accountants, and business advisers specialising in business disposals) on board early in the process. No-one can help you once it comes to signing on the dotted line as it may be too late.
4. Look for direct buyers and don’t just rely on brokers.
5. Be realistic about the price of your business. Ask yourself a simple question: Would I, knowing all about my business that I do, pay the price that I ask for it?

Also consider some deferred consideration when selling your business. After all, it is not very often that business owners get the full asking price up-front. There could be more benefit in part-payment up-front and part-deferred.

If you would like to investigate whether Luminar International may wish to buy your business, then contact us.

Luminar International
http://www.luminarinternational.com/
info@luminarinternational.com 

Happy Retirement, Baby Boomers!

by Paul Berry, UK Partner at Luminar International

The term Baby Boomer was used to describe the dramatic increase in birth rates primarily following the Second World War.  Its size is quite staggering with seventy-six million American children born between 1945 and 1964. In 2004, the UK baby boomers held 80% of the UK's wealth - some £5.4 Trillion, yes that’s Trillion not Billion and bought 80% of all top of the range cars, 80% of cruises and 50% of skincare products.  Nice lifestyle... for now.

The issue now is how the Baby Boomers realise the value of their assets.  This is particularly acute when you look at business owners.  One noticeable trend - according to family-business expert Frank Schneider – family businesses tend not to pass down the generations.  Only a third of family businesses were taken over by the second generation dropping to only 13 percent when passed onto the Grandchildren.

Furthermore:

• Ninety percent of all businesses with employees are family owned, and one-third of Fortune 500 firms are family controlled.
• A survey by PriceWaterhouseCoopers finds that one out of every two company owners plan to sell their business within the next 10 years. This represents about 8 million businesses.
• People 55 or older own 30 percent of all businesses with employees.
• Businesses with employees are expected to grow in number by 22 percent every five years, as they did from 1997 to 2002.

The concerns in the market place have led a lot of potential vendors to sit and wait.  The economy is struggling we are told, banks aren’t lending, profits are below the levels in the last few years.  All of which leads owners to be cautious.  However there is a risk is that in the next few years the tables may turn, as circumstances change.  With such a significant event as selling your own business, planning is essential.  If you plan to retire, getting the right building blocks in place now is vital.

If you would like to investigate whether Luminar International may wish to buy your business, then contact us.

Luminar International
http://www.luminarinternational.com/
info@luminarinternational.com