I want to show you how investing in the numbers can add value to your business. That can make you richer and make everyone happier. Including Revenue. What sparked this idea was a call from my friend Johnny this morning at 8.20. “Well Johnny, what’s up”?
“I’ve to tax the van and I need to get tax clearance. I’ve everything paid and up to date with Revenue. I sent the tax clearance form to them 3 weeks ago and Laura sent them an e-mail. I’m in a panic as the van could be taken off me with no tax on it”
Some of the points I’ll cover in this include
- Investment in the numbers
- Valuing the business
- Selling the Assets
- Selling the Shares
- Summary
Investment in the numbers
Investment in the numbers is exactly that. An investment. It’s you saying to yourself
“I want a good accountant that I trust to look after the numbers, so I know everything is right”
But what is right? What’s right for your business may not be right for a bigger or smaller business.
Sierra Madre Ltd imports niche wines from Spain, Argentina, and Portugal. They’ve been in business for 12 years and have 15 staff members. They supply into Lidl and Tesco and are working on another contract with a large grocery chain. Turnover in the year to December 2022 was €750,000 with a profit of €250,000.
Retained cash in the company is €500,000. The mother or Madre of the business is Carmen Delaney who owns 100% of the shares. Her husband Dermot works full-time in the business and is a Director too. Both are in their early 50’s and while they enjoy it, they feel they don’t get enough out of it.
They’d love to sell the business but need to keep working as have two kids coming close to college years. Dermot’s eyes begin to water a bit when he says
“Well, you know that won’t be cheap”
But there’s hope on the horizon. A much larger player, Tierra Padre Ltd, inquires about buying them. The Delaneys would love to get 5 times the profit plus the cash in the business. A total of €1,750,000 based on 2022 numbers. Let’s look at two situations.
Minimal investment in the numbers
Dermot hates giving money to accountants. Sure, they only collect tax for Revenue. Plus, he doesn’t want to be paying for that nice office and fancy car Mike, his accountant, swans around in. He knows Mike isn’t the best but he’s cheap and has only charged them €1500 plus VAT for the last 5 years.
Dermot does the VAT returns and looks after the payroll too. He finds the VAT a bit of a minefield with all the EU and non-EU stuff. Not to mention postponed accounting, and he’s tearing the little hair he has left out of his head when it comes to the VAT RTD. He likes doing the payroll as it’s very similar each week. Saying that, Revenue have been onto him to sort out some payments or else there was the threat of the Sheriff.
He promised Mike that he’ll get the bank statements and backup to do the 2023 accounts by the end of July. Dermot can’t find some bank statements and called the bank. He can’t believe they want to charge him, and he’ll get them in two weeks. He’s cursing Spot for eating the July and August statements.
Purchaser Request
Meanwhile, the owners of Tierra Padre have been on. So, they can make an informed offer they are looking for
- Most recent accounts for 2023 and 2022
- Management accounts for the 6 months ended 30th June 2024
- Confirmation that all taxes are up to date
- Copy of Tax clearance
- Debtors listing at the end of June 2024
- Creditors listing at the end of June 2024
- Current value of stock on hand
- Bank balance at the end of June 2024
They set a deadline of Friday the 9th of August. In their letter, they confirmed that their accountants would review the information. After that, a senior accountant Pat, would call to the office to carry out due diligence on the numbers.
Dermot knows he’s in bother now. Of all the things they are looking for he can only give them the bank balance at the end of June. He calls Mike about the year-end and management accounts. The best he can promise is the end of August for the year-end accounts provided he has all the information. Dermot decides to call John Desmond, the owner of Tierra Padre, looking for an extension. John isn’t impressed and will give the extension but stresses two points
- His surprise that it will take Dermot that long to give the information and
- They are looking at other companies to buy so could be cooler on any deal by the time they get the information. Something better could cross his desk.
Maximum investment in the numbers
Dermot and Carmen decided from day one they wanted to invest in the numbers. His friend Dave recommended Comerford Foley. And told him about the quality bookkeeping service he gets which includes
- Payroll
- VAT Returns
- Quarterly Management Accounts
- All taxes up to date
- Tax clearance
- Pre-year-end planning meeting
- Creditor payments plus
- Invoicing and cash collection
In effect, the Delaneys have outsourced their finance function to us. We did the 2023 company accounts in March. All taxes are up to date, and they have tax clearance. As we use Xero for cloud accounting, all the Sierra Madre bank statements come into that.
We’ll have management accounts for the end of June 24 by the 26th of July. Given we issue the invoices for them, we have a list of debtors and how long each owes money from. The only help we need from Dermot is a stock value at the end of June to complete the management accounts. Once they are done, we can get all the information to John by Friday the 2nd of August at the latest.
The 2023 accounts show a profit of €300,000.
Decision Time for Tierra Padre
It’s decision time for Tierra Padre and its owner John Desmond. When the Delaneys have adopted the minimal investment in the numbers approach John is
- More likely not to buy the business and look at other businesses but
- If he does buy, the offer could be a lot lower, especially after the due diligence project.
But if the Delaney’s have a nailed-on finance system in their business the opposite can be the case.
Firstly, John will be impressed by getting the information so quickly before the deadline. This will give him great confidence in the Delaneys and their company. Plus, he could offer more money than the minimal investment approach. Once the due diligence piece goes well that will give John the confidence to make a valuable offer.
Valuing the Business
The Delaneys get Ger involved in valuing the business. Ger uses the multiple of future maintainable earnings approach. Using the numbers in the 2023 accounts and management accounts he uses the €300,000 number
| Future maintainable earnings | €300,000 |
| Multiple | 4 |
| Value | €1,200,000 |
| Add cash | €500,000 |
| Total Value | €1,700,000 |
However, let’s assume that Dermot used the minimal investment approach. He comes to Ger looking for a valuation but doesn’t have the 2023 accounts yet. He also confirms that the senior accountant found some payroll and VAT issues during due diligence that will have to be sorted. Based on this information and the lack of a quality financial system in the business Ger uses a multiple of 3.
| Future maintainable earnings | €250,000 |
| Multiple | 3 |
| Value | €750,000 |
| Add cash | €500,000 |
| Total Value | €1,250,000 |
Due Diligence
Pat Mustard, the senior accountant with Mustard & Relish Ltd, found a few issues when doing his due diligence.
Dermot had
- Used an incorrect VAT rate for 2021 on some sales
- Some VAT returns are incorrect. There were no numbers in for postponed accounting despite purchases from Argentina
- Dermot was on the incorrect PRSI rate, so they had overpaid PRSI.
- Two of the employees have no contract.
Based on what he found he recommended that if John wants to buy the business, he should buy the assets and not the shares. If John buys the shares, then he’ll have to sort out the tax and employment issues. If he buys the assets the company still belongs to the Delaney’s, and they have to sort out the issues. So, there’s less risk for John when he buys the assets. But Dermot and Carmen should sell the shares.
Selling the Assets
John makes an offer to buy the assets of the business for €750,000. Of that €150,000 is for stock, equipment, vans, etc. The balance of €600,000 is for the client list or goodwill of the business.
As the company is selling the goodwill it creates a Capital Gains Tax liability in the company. With no CGT reliefs
| Sales Proceeds | €600,000 |
| Less Cost | Nil |
| Gain | €600,000 |
| CGT 33% | €198,000 |
| Net Proceeds in the company | €402,000 |
After selling the assets there is €902,000 left in the company. This is the cash balance and the net left after the goodwill sale. Dermot and Carmen can leave the money there or get the money out of the company. To get CGT rates and potential CGT relief they can liquidate the company. But they will have to sort the tax and any other issues first before the liquidator pays money to them.
Selling the Shares
On the other hand, Pat finds absolutely nothing wrong when he does his due diligence. The company is squeaky clean, and the financial processes are top-class. Pat sees no reason why John wouldn’t buy the shares. He offers the Delaney’s €1,700,000 for the shares and cash of the company. That money goes to Carmen as she owns all the shares
| Sales Proceeds | €1,700,000 |
| First €1,000,000 X 10% | €100,000 |
| Balance €700,000 X 33% | €231,000 |
| Net Sales Proceeds | €1,369,000 |
She’ll get 10% CGT on the first million once she qualifies for Entrepreneurs Relief [ER]. If they owned the shares 50:50 then they’d get €850,000 each. Assuming both could get ER then they’d pay €85,000 each or €170,000 in total leaving them with €1,530,000.
Summary
I was trying to show that investing in your numbers is an investment in your business. It can increase its value plus it’s very reassuring to you to know that everything is looked after. You want that confidence and peace of mind. So, if you need Bank Finance or are looking to sell you have the numbers to hand to get the money you need to grow. Or maximise the value of a sale or transfer to the next generation
This puts more money in your pocket, and you are keeping Revenue happy too. As for Johnny, he got his tax clearance in the end. But the time and effort to get it was painful when it could have taken less than 5 minutes. If you are a more mature business, you don’t want to waste time like Johnny. Time is precious and can be better spent elsewhere. Leave the numbers to the experts and outsource your finance function.
Do you want help getting a finance function into your business? If so, Start here
