How do you value part of your business?
Discussion
Firstly I have opened a new account for this topic for obvious reasons, what I am after is a bit of advise on how to value part of your business with a view to sell that part only. Background below;
I have a successful small business turning over some £2.5M with a net profit of circa £500K, within my business I have 3 divisions, the first division employs 3 people, the second division just one person and the third division 17 people, it is the third division that I am looking to dispose of as it is basically 20% of my turnover and 80% of my costs, and is the major user of energy.
Division 3 is a fairly unique business, we are the only company in the UK that manufactures this product and have just two other competitors in the EU and possibly one in the Far East.
We manufacture approximately 4 million pieces a year, our known competitors produce in total some 40+million pieces per year. The major competitor is interested in purchasing my manufacturing process and amalgamating with his facility - all 17 people will be made redundant should the sale take place.
I have some machinery that would be wanted at a value of circa £200K and other equipment that would have very little or no value due to our production methods.
My figures for the last 5 years are as below;
01/08/2017 - 31/07/2018
Cost £413K - Sales £592K - Margin £179K GP 30%
01/08/2018 - 31/07/2019
Cost £397K - Sales £584K - Margin £187K GP 32%
01/08/2019 - 31/07/2020
Cost £365K - Sales £547K - Margin £181K GP 33%
01/08/2020 - 31/07/2021
Cost £283K - Sales £464K - Margin £182K GP 39%
01/08/2021 - 31/07/2022
Cost £305 - Sales £464K - Margin £158K GP 34%
Current year to date is Cost £60K - Sales £94K - Margin £34K GP 35%
The cost of sales and therefore the GP margin have some of the everyday costs within the figures such as energy, rates, NP people and rent.
The other two division are very profitable especially Division 2 which is a distribution hub, we buy in bulk and resell in smaller quantities.
Obviously if I were selling the whole business the value would be fairly easy to calculate, but selling just a portion of it is something I have no experience of.
I have a successful small business turning over some £2.5M with a net profit of circa £500K, within my business I have 3 divisions, the first division employs 3 people, the second division just one person and the third division 17 people, it is the third division that I am looking to dispose of as it is basically 20% of my turnover and 80% of my costs, and is the major user of energy.
Division 3 is a fairly unique business, we are the only company in the UK that manufactures this product and have just two other competitors in the EU and possibly one in the Far East.
We manufacture approximately 4 million pieces a year, our known competitors produce in total some 40+million pieces per year. The major competitor is interested in purchasing my manufacturing process and amalgamating with his facility - all 17 people will be made redundant should the sale take place.
I have some machinery that would be wanted at a value of circa £200K and other equipment that would have very little or no value due to our production methods.
My figures for the last 5 years are as below;
01/08/2017 - 31/07/2018
Cost £413K - Sales £592K - Margin £179K GP 30%
01/08/2018 - 31/07/2019
Cost £397K - Sales £584K - Margin £187K GP 32%
01/08/2019 - 31/07/2020
Cost £365K - Sales £547K - Margin £181K GP 33%
01/08/2020 - 31/07/2021
Cost £283K - Sales £464K - Margin £182K GP 39%
01/08/2021 - 31/07/2022
Cost £305 - Sales £464K - Margin £158K GP 34%
Current year to date is Cost £60K - Sales £94K - Margin £34K GP 35%
The cost of sales and therefore the GP margin have some of the everyday costs within the figures such as energy, rates, NP people and rent.
The other two division are very profitable especially Division 2 which is a distribution hub, we buy in bulk and resell in smaller quantities.
Obviously if I were selling the whole business the value would be fairly easy to calculate, but selling just a portion of it is something I have no experience of.
It makes money, however if I dispose of the particular sector the business would actual make more money - I have run a budget with sector 3 removed and although the turnover reduces, profit rises in the main due to a significant reduction in wages..
Edited by Peachesandcream on Friday 14th October 09:08
Peachesandcream said:
It makes money, however if I dispose of the particular sector the business would actual make more money - I have run a budget with sector 3 removed and although the turnover reduces, profit rises in the main due to a significant reduction in wages..
Sounds like if you pay them to take it you’re better off, work out the number where that’s not the case, this is your bottom line. The best figure for you is the most they’re prepared to pay for it.Edited by Peachesandcream on Friday 14th October 09:08
Afraid it’s just a normal negotiation, there’s no magic formula for this
If you have a buyer potentially already and you will increase profits if this dept goes, then why not just ask for net asset value of the equipment as a best case scenario? If not, let them lead and then snap their hand off.
I’d be looking at this as a win win. Less staff/ hassle and more profit. Even without higher profit, the idea of having less staff is surely very attractive?
I’d be looking at this as a win win. Less staff/ hassle and more profit. Even without higher profit, the idea of having less staff is surely very attractive?
Edited by pomp1 on Friday 14th October 09:43
Not directly related to your core question, but something that bears consideration.
You mention 17 lay offs, as you'll be selling the assets / Good will and not the company itself, you'll (the remaining / existing profitable company) be liable for their redundancy costs and associated periods of consultations etc, so you'll really need to consider this and take some strong HR / Legal advice to ensure you don't leave yourself open to claims here due to procedural / precedent anomalies.
You mention 17 lay offs, as you'll be selling the assets / Good will and not the company itself, you'll (the remaining / existing profitable company) be liable for their redundancy costs and associated periods of consultations etc, so you'll really need to consider this and take some strong HR / Legal advice to ensure you don't leave yourself open to claims here due to procedural / precedent anomalies.
Peachesandcream said:
It makes money, however if I dispose of the particular sector the business would actual make more money - I have run a budget with sector 3 removed and although the turnover reduces, profit rises in the main due to a significant reduction in wages..
That doesn't compute. Unless the NP of the sector is negative, in which case you know what it is worth.Edited by Peachesandcream on Friday 14th October 09:08
In reply to the human element, the cost of redundancies would be circa £129K, all of the procedures would be followed to current Employment Law using our external HR consultants.
There would be no transfer of labour, even if anyone wanted to go the 90 days in any 180 would prevent that.
There would be no transfer of labour, even if anyone wanted to go the 90 days in any 180 would prevent that.
One last option which has the potential of being seen as politically more sensitive,
Is an MBO not something to consider here? It has tax benefits to you (iirc no CGT on an MBO) and may maximise your eventual return whilst giving you the distance and numbers boost you’re seeking.
Understand a clean break is the most efficient, but sometimes the human element can have tangential impacts elsewhere in life.
Best of luck with which ever decision you make!
Is an MBO not something to consider here? It has tax benefits to you (iirc no CGT on an MBO) and may maximise your eventual return whilst giving you the distance and numbers boost you’re seeking.
Understand a clean break is the most efficient, but sometimes the human element can have tangential impacts elsewhere in life.
Best of luck with which ever decision you make!
22 said:
Similar to an MBO, but what about an Employee Ownership structure?
You sell tax-free, existing staff and management remain. You get paid from trading revenues, sensible valuation easily agreed by HMRC, no redundancies.
Employee trust / scheme was actually what I was alluding to, hence the CGT benefits. You sell tax-free, existing staff and management remain. You get paid from trading revenues, sensible valuation easily agreed by HMRC, no redundancies.
Apologies if I wasn’t quite clear about that
Random Google link on EOT
https://postlethwaiteco.com/employee-ownership-tru...
There is no other Manager except me I have a QM and he would be part of the redundancies, I have considered a sale to the employees, operating from the current building and paying a documented share of the costs etc.
I am due to speak with the competitor in a few weeks time to discuss the sale etc after I have an offer on the table I will see what are my best options are going forward.
I am due to speak with the competitor in a few weeks time to discuss the sale etc after I have an offer on the table I will see what are my best options are going forward.
[quote=JamieBeeston]
Employee trust / scheme was actually what I was alluding to, hence the CGT benefits.
Looking at the link (thank you very much) it seems it only applies if 50% or more of the shares would be distributed, I plan on keeping the remainder of the business for the foreseeable future as it will provide a reasonable income, especially as I plan on moving to Spain in the next couple of years and I would need a documented income etc to avoid the 90 in 180 days rule.
Employee trust / scheme was actually what I was alluding to, hence the CGT benefits.
Looking at the link (thank you very much) it seems it only applies if 50% or more of the shares would be distributed, I plan on keeping the remainder of the business for the foreseeable future as it will provide a reasonable income, especially as I plan on moving to Spain in the next couple of years and I would need a documented income etc to avoid the 90 in 180 days rule.
NDA said:
A ready reckoner might be 8 times profit before tax - pricing the plant/machinery separately. Adjustments may be made if the business relies on the other two divisions in some way - distribution, premises.
Would the acquiring business would take some employees under TUPE?
I think this is right. we sold part of our business and all employees have to be TUPE'd across. I would imagine that if they didn't want them, they would be responsible for the redundacy, although they may make this part of the negotiation of the sale?Would the acquiring business would take some employees under TUPE?
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