The Alternatives to Selling Your Business
The consolidation of the letting industry continues at a frenetic pace and hardly a week goes by now without a story of yet another independent agent being snapped up by a larger competitor. However, we are approached on a regular basis by people who want to retire but do not want to sell their business to a corporate. So, what are the alternatives?
The first option is to put a manager in to run the business. Sadly, this seldom works for very long because the manager quickly becomes resentful at the fact that they are doing all the work and someone else, in their eyes, who does nothing is still taking most of the profit.
This resentment makes them become lazy or sloppy or greedy or dishonest or some combination of all of these things and when they do, the profits quickly reduce to almost nothing.
Another factor to consider is that dividends taken from the business will be taxed at up to 45% whereas the proceeds of a sale are usually taxed at 10%. For all these reasons, this option doesn’t work for most people.
The second option is a management buy-out. We completed two of these last month but it is not the right solution for most business owners. The first problem is that it is very difficult for the MBO team to raise money at the moment. Interest rates are very high and even if a loan is made available, the lender will usually demand an unlimited personal guarantee from every member of the MBO team secured on every asset that they own including their own family homes. Many people are simply not prepared to gamble everything in return for the opportunity to become a little better off.
As a result of the difficulty with obtaining finance, the seller is often asked to accept payment over a period of several months. This leaves them very exposed to the MBO team defaulting on the loan if the business gets into trouble. Many sellers, when faced with a choice between getting most of the sale price on completion and being paid over a period of up to five years, take the safer option and who can blame them?
Another problem with MBOs is that there is a huge difference between being a good manager and being a good business owner. Many long-serving managers simply do not have the skills and experience to manage essential functions of running a business such as cost control, cashflow management, strategic planning, human resources, compliance, marketing and IT. Without these skills, the business can easily fail.
A third option is a merger with another likeminded firm. In practice, these hardly ever work out and we have only completed two mergers in the last twenty-five years. It’s hard enough to value one business but a merger requires a valuation of both businesses so that the correct apportionment of shares can be agreed. If this can be agreed, negotiations usually break down at the next stage when the two parties start discussing what the business will be called, who will take each job, how salaries and commissions will be calculated and how decisions will be made.
The fourth option is to sell part of the business in order to release some cash and reduce working pressures. This usually involves selling the letting business and keeping the residential sales business and other departments. For many people, this can be a good solution. A high percentage of the value of most businesses will be in the managed letting book. Running a letting business is also much more difficult than running a sales business and the compliance risks are much greater.
Before you consider this option, you will need to prepare a detailed business plan and cashflow forecast in order to ensure that a sales-only business could be financially viable. If it is, then this option is worth serious consideration. There are two main drawbacks. Selling part of a business is usually less tax-efficient than selling the whole of a business. However, there are ways to get around this problem. The second drawback is that the remaining sales-only business will have very little value when the time finally comes to retire completely. However, if it has made good profits for many years, then this will be less important.
The final option is to choose deliberately to sell to an independent agent rather than to a corporate. I would not recommend this because it is over-simplistic. It is simply not true to say that all independents are good and all corporates are bad. The only way to make an informed decision on this is to run a proper competition with offers from a selection of different companies so that you can properly assess the merits of each party.
There is of course one more option and that is to carry on working for a little longer. I have learned from experience that people will sell a business when they are ready and not a moment before. However, no-one can carry on forever and there is a point where one has to accept that there is no point working hard to provide for a comfortable retirement if you don’t start it until you are too old and too frail to properly enjoy the fruits of your labours.
Adam Walker is a management consultant and business transfer agent who has specialised in the property sector for more than forty years.