Consolidation in the freight and shipping sector appears to be a current trend with many business owners exploring their options, seeking valuations and reviewing contracts. Here, Beatons’ Head of Tax, Andrew Diver, looks at some key considerations for organisations seeking clarity before making a sale.
We are often asked how much is my business worth - and it can seem like a how-long-is-a-piece-of-string kind of question. The truth is it often involves a bit of a tug of war until a price is agreed to suit both parties.
Buyers will look for a greater proportion of the consideration to be tied to future performance (earn-out) while vendors usually would want a clean exit.
While business value ultimately depends on buyer willingness, several standard approaches help determine fair pricing.
A common valuation method combines net assets (physical assets on the balance sheet) with an earnings multiple based on projected payback period.
You may have heard the term EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) which is often the earnings adopted.
Factors that can enhance your multiple include:
- Operational independence from owner
- Stable recurring client base
- Distinctive market positioning
- Strong management team
- Robust operational systems
- Secure long-term property leases
My advice would be to look at these points at least a couple of years in advance of considering a sale as these factors can take some time to implement and imbed into an organisation.
Structuring the deal
Buyers typically adjust profit figures to estimate sustainable future earnings by:
- Removing one-off gains or unusual profits
- Adding standard operational costs previously paid as dividends
- Adjusting for excessive owner pension contributions
Many deals incorporate earn-out structures, where part of the sale price depends on post-sale performance metrics like revenue, profit, or customer retention over one to three years. This approach benefits both parties - buyers reduce overpayment risk while sellers can achieve higher returns through strong performance.
My advice would be to think about what periods are being used for earnings purposes. Are we averaging the last three years profits or are we weighting most recent profits over those of three years ago? Do any of these methods favour your valuation?
Appropriate remuneration package and employment contract for exiting shareholder/directors will be required and can be as important as the earn out details.
Post-sale considerations
Most buyers require seller involvement during transition to maintain client relationships and ensure smooth handover. Factor this into your timeline and long-term planning. You want to continue to be involved if the lion share of your consideration is part of the earn out!
Tax implications
Tax timing requires careful consideration, particularly with earn-outs.
In the UK, tax on the total sale value becomes due by January 31st following the tax year end (April 5th). This can create cash flow challenges if earn-out payments comprise a significant portion of the sale price, as tax liability may exceed initial payments received.
There have also been significant changes to the Business Asset Disposal relief rules following the last budget which could increase your tax liability by £80,000 over the next couple of years as rates of tax will increase.
There could be real benefits in shareholders reviewing how they hold their shares over the next couple of years ahead of any prospective sales.
Professional guidance is essential for navigating these complexities and optimising both deal structure and tax efficiency.
For help and advice, contact the team via info@beatons.co.uk or by calling 01473 659777.