Planning Your Exit Strategy

By Phil Mitchell, Director, Harbour Key.

 

Many people develop their business with the ultimate goal of selling it to a third party for the maximum possible price, enabling them to move on to pastures new or perhaps to fund their retirement. To be successful, early planning will ensure that you have the right structures and processes in place to maximise success. The military say no plan survives first contact with the enemy, but in business a clear plan will provide a framework and strategy for a change of direction.

 

There are three key factors to achieving a successful sale: planning, preparation and above all patience.

 

Planning

Although you will have your own timescale for when to sell your business, market conditions generally dictate the actual timing, including the financial climate, potential buyer profiles and market trends. For some businesses, Brexit may be a factor; for others, it may not be relevant at all.

 

The first stage is to decide on the realistic price you would like to achieve and when you would like to sell.

 

You then need to work out how you are going to get there by creating a business that is valuable, viable and attractive to potential purchasers.  Your business is only worth what the highest bidder will pay, and your view may be very different from that of a prospective buyer.

 

The core factors that will be considered by a potential buyer are the same for every business, whatever your sector:

  • Brand and reputation
  • Sales and clients
  • Processes, procedures and infrastructure
  • Profits and cash flow.

 

A business that is heavily dependent on one person, product or customer may be difficult to sell. If you, as the owner, are seen as the business, it becomes less attractive and less valuable.  A strong management team supported by a strong brand and reputation will show a strength and depth which will be attractive to potential buyers. This means that it is important to select and incentivise a good management team. They can add value to a business and assist with preparing for sale in a number of ways:

  • develop the basics e.g. a sales director can target clients and improve sales; a finance director can improve financial processes and cash flow and oversee expenditure
  • provide the new owner with continuity after the sale, ensuring that existing client contacts are maintained
  • enable you as the owner to exit earlier. You will usually remain for a time after the sale, but the stronger the management team remaining to run the business, the earlier you can move on
  • provide a potential purchaser: the management team could acquire the business with funding assistance from, say, a venture capitalist
  • prevent the business being damaged while you work on the sale.

 

Retaining good individuals requires a considered incentivisation package both pre- and post-sale. The package will depend on the industry sector, the size of the business and the individuals themselves. Some people will prefer cash bonuses, but a less expensive alternative is a share option plan. This is only available to limited companies, with the most common being the Enterprise Management Incentive Scheme (EMI). EMI is a highly flexible and tax efficient scheme designed specifically for smaller companies, with the recipients selected at the employer’s discretion.

 

Preparation

Although historic accounting facts are important, the keys to achieving the optimum price are current profitability, future earnings and potential risks arising from change of ownership e.g. loss of customers.  A business that relies on a small number of clients can be considered high risk and therefore less valuable. It is therefore vital to spend time improving profitability, minimising risk and preparing future earnings forecasts.

 

We recommend reviewing every facet of your company and addressing any problems that could devalue the business. No-one will want to acquire a business with an outstanding VAT enquiry or employment tribunal issue, at least without a price reduction. Carry out your own internal due diligence and resolve any issues.

 

You should also look closely at your ownership.  Many people assume that they will only have to pay a rate of capital gains tax of 10%, as entrepreneur’s relief will apply. It is important to remember that shares in trading companies can be tainted for entrepreneur’s relief purposes by substantial non-trading activities such as owning investment properties or active management of surplus cash.

 

The review should consider any non-trading activities that may need to be stripped out, and should also review share ownership. For example, a shareholding spouse who does not work in the business will not be entitled to entrepreneur’s relief and a multiple shareholder base (particularly where some are no longer involved in the business) can often affect your ability to react to changes and ultimately to negotiate a sale.

 

Patience

The most important part of selling a business is patience. It is vital to continue to operate your business as if it was not for sale, and to understand that many deals fall through. As a general rule, the more prepared your business is for sale, the faster it will sell and, if it doesn’t, the less impact the process will have on your input into day to day operations.  It is very easy to have your head turned by what may turn out to be empty promises – it has been known for parties to deliberately disrupt a competitor’s business through a protracted sale process which ultimately they have no intention of honouring.

 

Many owners put in a lifetime of hard work building their business only to throw away some of the rewards by failing to consider properly how they will sell their business. Use these three factors as a guide and you should achieve the optimum value for your hard work.

 

For further information please visit Harbour Key at www.harbourkey.com