Selling a business is time consuming, emotive and can be costly if not executed correctly.
As we emerge from the rollercoaster of lockdowns over the last eighteen months, our economy is starting to roar back into life, and as a result, there is an increased interest in SME’s across all sectors from both trade and private equity buyers. This, coupled with the availability of both debt and equity funding, makes it an opportune time to consider an exit strategy.
In this article, we explore a range of considerations when selling a business.
Preparation is key to achieving the best value. The preparatory phase is when you should engage with your adviser and thoroughly review the business and its value drivers.
Ask, ‘why would someone want to buy my business” and then focus on this.
Prospective purchasers will demand transparency, so dealing with potential red flags and ‘deal breakers’ in advance of the buyer due diligence process will help protect value.
Telling your businesses story is essential and understanding how to present its financial information, both historical and forecast, is a crucial element of the process.
What is the succession plan? With many owner-managed businesses, the owner is the business. A potential buyer will attribute little value to a company where its driving force (the owner) will be exiting or retiring in a short period after the sale.
Early tax planning protects value. The shareholders should consider the tax implications in advance of the process as time is of the essence where restructuring is required to effect a tax plan.
Early key questions to be answered;
- Is there an opportunity for family members (children and siblings) to be involved in utilising tax reliefs such as business asset relief for capital acquisitions tax purposes?
- Is there an option to claim retirement relief or entrepreneur relief for capital gains tax purposes?
- Is there an option to review the group structure as a holding company can be beneficial when selling all or part of a business?
Perhaps the desired solution is a hybrid approach, providing a portion of the business to the next generation while selling a portion externally to generate some funds personally.
It is crucial to consider the tax considerations above with the overall commercial plan.
Identify Prospective Purchasers
Understanding and researching the potential buyers for your business is an essential part of the process.
Every business owner can name several potential buyers, be that a management team or a key competitor.
However, other potential buyers may not appear on a list, may have different strategic reasons for buying and may pay a premium for the business, i.e. new market entrant, acquiring IP, or gaining access to resources (e.g. people).
Keeping the process confidential during these early stages is vital as it may ‘spook’ potential customers or suppliers or unsettle critical employees. Having an adviser on board will help maintain confidentiality.
Negotiating The Deal
Once potential purchasers are identified, they may enter a period of limited due diligence.
Much valuable insight can be gained during this period for the vendor, regarding how the due diligence has conducted the type of queries and questions raised. Having this insight early on will help in the price negotiation phase.
It’s not advised to name your price, solicit offers for potential acquirers setting strict deadlines for offers. The seller must maintain control of the process at this stage.
A second round of offers may be required until a preferred bidder is selected, after which they may enter a period of exclusivity to carry out a more detailed assessment of the company.
This selection criteria should not be based on price alone, and factors such as, ability to execute the deal and sources of funding should also be considered.
Closing The Deal
Negotiating the transaction documents is the final part of the process and also very important for both buyer and seller protection.
Considerations will need to be given to the deal structure.
Will part of the consideration be based on an ‘earn out’ from future profits?
Will the owner-manager be required to remain with the business for a period post-sale to help with the handover of relationships and integration?
The sale process is a time consuming and very involved process for the business owner, and often management teams are distracted by the process taking their’ eye off the ball’ to the detriment of the business.
Getting your advisers involved early in the process will help avoid many of the common pitfalls and ultimately protect the value that in many cases has been built up in the business over many decades.
At Roberts Nathan, we have worked on many buy-side, sell-side and management buy-outs in the recent past, and we have a wealth of experience advising owner-managers through the transaction process.
Please get in touch with us if you would like to understand more, my details are in the link below: https://www.robertsnathan.com/member/derek-dervan/