by Jeremy Over, Partner, Corporate and Commercial, Moore Blatch
Most people set up a business in the hospitality sector – whether it is a B&B, Pub or catering business – as a lifestyle decision with a view to making a decent living but most, will also consider cashing in at some point. So, how do you maximise the cash that you can receive should you wish to sell your business as a going concern?
It’s worth starting the obvious: a seller wants the highest price and the buyer will want to negotiate it down. And, while there are many ways to value a business, including earnings multiples, asset valuation, cost to set up and replicate, discounted cashflow, or industry-based models, there are some fundamental issues that will underpin how much the business is worth.
Whether you are running a small catering business or a smart 5 star dine-in restaurant your most valuable financial asset is normally intangible and that is your reputation. Reputation breaks down into a number of factors and, financially, is referred to as ‘goodwill’. Goodwill covers a range of areas including intellectual property, customer loyalty, your corporate brand and any customer database.
Tangible assets, on the other hand, are generally easy to value and offer little differentiation, whether it is the property, unless it is in a particularly key location, catering equipment, or stock. Also, tangible assets typically have the same value from business to business as broadly you will have the same fixed assets as everyone else. So, barring prudent good practice such as demonstrating the necessary compliance with health & safety, food standard regulations, general upkeep etc, your most important considerations are those intangible assets.
To make the most cash from a sale you need to look at what makes your business different and better than your competitors and normally it’s your name (brand) and the reputation that goes with it.
Most hospitality businesses are fiercely protective and proud of their ‘brand’, so it can be a surprise to business owners that they often don’t own their own copyright for intellectual property assets, such as their brand name or image. Often, depending on the wording of the contract, these rights vest with the developer (such as the marketing agency), even though you paid for the creation. You must check that the developer transferred ownership of those rights to you so that you are free to sell them with the business.
While not complicated, securing a trademark or corporate brand is something that you probably should take advice on, and there is a good government guide and checklist to intellectual property valuations at www.ipo.gov.uk.
In order to demonstrate the value of your brand and reputation you need to take a look at your business’s accounts and accompanying financials. We would therefore advise spending time before any discussions to pull together all the necessary documentation that supports your turnover and profitability claims and that the financial information is presented in a clear and coherent format.
Other legal issues that need addressing before a sale are to ensure contracts with key customers/ suppliers are in place and are not terminable in the event of a change of ownership. Therefore, if any relationships is key to the operation of your business, such as a deal with suppliers or a contract to supply a local nursing home with 50 meals once a week then you will want to ensure that a sale will not result in those contracts coming to an end.
Staff issues often need addressing including having a record of working hours and whether staff have signed an opt-out form regarding the EU’s working time directive. You also need to hold records of any benefits provided, for example compliance with the new auto-enrolment pension regulations. Also, you should have a record of any contractors or workers that are used and a copy of any relevant contract/agreement that is in place, or alternatively a summary of the arrangement in practice.
Finally, look at any historic financing issues as businesses are often set up where a director or shareholder has given a personal guarantee for a loan or bank finance and it is essential to ensure that this is terminated upon any sale. Failure to do so could inadvertently mean that this guarantee stays in place for the buyer – good news for them, but not for the guarantor.