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What Do High Growth Businesses Do Differently?

Over the past 5 years the importance of the “High Growth Business” and how this relatively small group of businesses disproportionally impa...

Wednesday 30 January 2013

The Five Most Common Mistakes when Buying or Selling a Business

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For most business owners buying or selling their business is a rare event indeed. In fact many owner managed businesses do it only once, when they exit their business to retire. Like most things in life the first time you do something is the occasion when you make the most mistakes. If you are selling a business you can't afford to make mistakes because its the only chance you'll get.

When buying a business  making a mistake can leave you not only seriously overpaying for a business but having a management headache which may take years not months to put right and in the meantime will seriously damage the prospects of your current business.  

It may be some comfort to know that it is not just smaller businesses the make horrendous mistakes, big businesses all too regularly fall into the same trap. I know from personal experience the the business I worked for in my last corporate role was purchased by another company and the acquisition almost brought the acquiring company to its knees, because as far as I could see it made two of these common mistakes.

Mistake No1 Getting emotionally involved with the sale.

Mistakes in Buying a business
SOLD! (Photo credit: my_new_wintercoat)
Lets face it, its exciting to be buying or selling a business and it requires a lot of management time. For the vendor selling a business  there is the prospect of making that exit and having the money to retire. For the buyer there is the undoubted prestige of acquiring a business and the prospect of a big jump in company size or new geographic coverage.

The result for the unwary buyer is that in buying a business they get duped into paying too high a price because they get wrapped up in the chase. For the novice seller the process of selling the business gets dragged out over a long period of time, causing them to take their eye off the day to  day management of the business, often leading to a downturn in its fortunes and so its ultimate price. 

Mistake No 2 Not Having a Walk Away Number

Have a walk away number
Negotiation Cartoons: Positions Vs. Interests (Photo credit: jonny goldstein)
Buying or Selling a business involves negotiation, in order to make sure you don't pay too much when buying a business or get paid too little when  selling a business you need to establish 1. what is the value of the business and 2. what is the maximum you'll pay or minimum you'll accept. Once you've established this you'll be much better placed in the negotiation and you'll be less likely to make mistake No1

Mistake No 3 Not understanding the Impact of Culture 

This Ladies and Gentleman is the big one, of all the issues that get overlooked culture stands head and shoulders above everything else. Good businesses have strong cultures, their staff have bought into the fact that their way is the right way. Now imagine what happens when these staff are told, that their way is no longer the right way and your way is the right way. Yes that's right they'll find every reason to demonstrate the flaws in your system and why your way is not the right way. Worse they are butting up against your staff who are equally convinced that your way is the right way. So you tend either to have a very difficult integration problem because you now have two opposing camps or you have an attrition problem as the staff from the acquired company leave.

The seller will of course say that culture isn't a problem, because to him it isn't. Either there isn't a problem with culture or its too late for you when you find out there is as he's already got his money. Why don't people address this problem? Firstly because so many don't even recognise it as an issue and secondly because the have made mistake number 1 and are looking for reasons to buy rather than looking for issues.

Mistake No 4 Underestimating Management Effort

Buying a business is just the first step, now you've got to integrate it with the rest of your business so that means addressing, culture, strategy, planning, financial systems, sales, customer relationships a new organisational structure to mention just a few. The management effort to achieve this is considerable even if you have willing staff , so don't be surprised if it takes 6 months to a year to get it all bedded down. This effort is considerable even if the new acquired company is small in comparison to yours.

 Mistake No 5 Buying a business that is too big or too small

This tends to relate to the problem of biting off more than you can chew. Remember the bigger the business you buy in relation to you the acquirer the more political clout it will have and the more concessions you will have to make, and the longer integration will take. The more your management is focused on the acquisition the bigger the risk that they will let your core business slip and then you have a really big management headache, that is, trying to integrate the new business and recover your own.

The other side of the coin is that you waste your money on something too small which won't payback a recent return on all the management effort required to integrate it into your existing business.

Once you understand these problems you are on your way to avoiding them and making your acquisitions a success and not a millstone.

Exigent Consulting provides specialist services for High Growth BusinessesBusiness Turnaround, and Mentoring to the Small and Medium Business. We help business owners improve the profit performance of their business. 

Monday 21 January 2013

IR35 - Are you In or Out?

This week I have invited Kevin Ball to talk about  IR 35. In my discussions with business owners and contractors this remains an important but misunderstood issue. Kevin I think provides a clear explanation. Over to you...

IR35 legislation is a common bugbear for a lot of self-employed people. It is often criticised for being vague, intrusive and overly complicated. Despite this, UK Chancellor George Osborne made it clear in his December 2012 statement that IR35 is here to stay; so what is IR35 and why does cause so much bother?

IR35 is a piece of legislation that HMRC use to determine employment status. It is of most concern to independent contractors and the businesses that hire them.  It was originally introduced to combat situations where people would pose as independent contractors for tax purposes whilst still enjoying all the benefits of being an employee.

HMRC will consider anyone who is an employee as “inside IR35” and anyone who is genuinely independent as “outside IR35”.  If you are outside IR35 you will pay corporation tax instead of PAYE and NI; this is a far lower rate of tax so it is important for contractors to stay outside IR35.

Typically, if a contractor is outside IR35 they will:

·         Be capable of working on their own
·         Be financially accountable for their work
·         Provide their own equipment
·         Receive no employee perks such as pension contributions or sick pay

If a contractor is unable to display the above then it is likely that HMRC will consider them to be inside IR35 and an employee of the business that has hired them; they will also be expected to pay regular levels of income tax. If HMRC launch an IR35 investigation, and it is found that a contractor has been paying tax outside IR35 whilst working inside IR35, then HMRC can demand anywhere from 30-100% of the tax avoided back depending on whether the avoidance is deemed to be accidental or negligent.
Flowchart on behalf of The Accountancy Partnership

The importance of IR35 awareness for contractors is obvious but it should also be important for any businesses that use contractors. Businesses must make sure that the contracts they are offering are outside IR35 in order to attract the most astute and honest contractors they can.

Checking for IR35 Compliance

HMRC offer a business entity test that contractors can take to ascertain where they are with regards to IR35. After completing the business entity test the taker will be awarded with a score that corresponds to either a high, medium or low risk of being inside IR35 and therefore investigated; anyone achieving a low risk rating is unlikely to be investigated at all. The questions in this test should also give any businesses hiring contractors a good idea of what they should, and should not include, in the contracts they draft. If there is still uncertainty then employment law experts and contractor accountants can review any contracts before i’s are dotted and t’s are crossed.

IR35 can certainly be a tricky piece of legislation but with the proper research it shouldn’t be the headache it is often portrayed to be.