Grooming your business for sale

There's no doubt that good pub industry operators who make a decent fist of things enjoy what they do.

After all, what's not to like? Building up a hospitality business from scratch into an operation to be reckoned with, one that offers punters a good time and makes money to boot is what makes some people get up in the morning. All that entrepreneurial endeavour certainly gets the juices flowing. But there comes a point when every go-getter thinks about selling up.

Whatever the background in deciding to sell - whether one is looking to step up to the next level of operation or one is just plain bored - the process can be a complicated affair. And timing is also a crucial element. The performance of the economy at any given time has considerable bearing on deciding when to shut up shop.

Andy Harris, a corporate finance partner at consultants BDO who specialises in due diligence, says - not unsurprisingly - that with valuations at their current low levels now is not the best time to sell even a business that is performing well.

Banks, he says, while tentatively entering the market after the crash of last year, "will largely refuse to lend beyond a 50:50 debt equity split".

Better footing

But there's no harm in putting the business on an even better footing for when the time is right, he says. Besides, private equity firms have started to look at leisure and hospitality businesses again after a couple of years of inactivity.

"The private equity mindset has moved on from its position in recent times. These firms have cash sitting there and they need to show they can invest it well," says Harris.

Harris says he is encountering operators who think they will delay selling up until earnings multiples improve. But this is a risky strategy.

"We would caution against people looking forward two years and thinking they'll reap the rewards of an improving economy." Why? It's a matter of tax, he says. Whatever party comes into power after the general election, taxes are likely to rise.

"Valuations won't get to where they were three years ago. But importantly one's net proceeds from a disposal could be liable to a higher tax burden than has been the case," he says, noting that capital gains tax (CGT) could rise under a new administration.

"It is highly possible that CGT rates will increase in 2010 as the incumbent government seeks to boost tax revenues. As a result owners may benefit from bringing forward their plans to sell."

So what to do? "As an owner of a business you will clearly get a better valuation for your enterprise if you spend time grooming it," he says.

And what is 'grooming', exactly? "While a strong and profitable operation is the most important aspect of a business, having the right systems in place and a good set of people are vital," Harris explains.

Forward view

As well as tabling a business plan - which should include three years' worth of accounts - it is important to present a view on where the business is going strategically and, in some cases, physically.

"Your management team should be clear in setting out where they see the future growth opportunities and how they expect them to be achieved," says Harris.

"Also, ask yourself if your business has roll-out potential. If your business is established in London can it work in other cities? If you believe it will can you prove it?"

William Baxter, Harris's colleague at BDO and a director in its corporate finance lead advisory team, said it is currently a seller's market for those looking to dispose of their business, but accepts that if a business is performing well there's little incentive to offload.

"And those who do want to sell have adjusted their expectations regarding the sort of multiples they are likely to achieve," he adds.

Finally, when it comes to companies in difficulty the first option is a debt for equity swap. It's not a perfect solution - the equity gets 'recalibrated', notes Baxter - but it can ease the pressure at just the right time.