The decision to exit a business is one of the biggest and arguably most difficult SME business owners will face during their business life, having typically lived and breathed the business since it was established.
The majority of business owners will only have one exit event in their business lives, as such it is essential to be well prepared for an exit process in order to maximise value, ensure the business goes to the right buyer and ultimately to deliver a successful exit.
1. Understand the drivers for exit
Many entrepreneurs and owners have been with their business since they were established, so attracting the maximum capital value is not always the key driver behind an exit. It is not uncommon for a business owner to want the business to be passed on to the management team or to a buyer or investor that will look after the workforce. The key drivers are likely to have an impact on who the ultimate buyer of the business is.
2. Valuation expectations
Have realistic valuation expectations. No two businesses are the same, so whilst the valuation of similar businesses is a good guide to follow, it should not be the only one. Setting valuation expectations at a realistic level will attract a larger number of potential buyers, which in turn will drive a competitive exit process, subsequently driving the valuation.
In order to attract the right buyer or investor and maximise value, it is important to start preparing for an exit well in advance. This is ideally 12 to 18 months before entering into an exit process. This allows the business to be positioned to attract buyers or investors, start to prepare the information buyers or investors are likely to require and deal with any issues that may impact on the success of the exit process.
4. Financial reporting
During the sale process – which can last upwards of six months, if not much longer – you will need to ensure that key indicators of the business remain attractive to buyers. So firstly, do focus on keeping sales, profits and margins in line with expectations and forecast growth. There is no substitute for having robust financial information.
5. Customers and suppliers
Preparing a business for an exit process well in advance allows business owners to make sure contracts and agreements with key customers and suppliers are tied up and will remain in place following a change of ownership. Having key customers and/or suppliers tied in will help to drive value in the process and maintain value with the ultimate buyer through due diligence.
6. Management team
In the same way as with customers and suppliers, preparing for exit well in advance will allow key members of the management team to have the appropriate service agreements that ensure they will stay with the business. This is especially key with any business that could be termed a ‘people business’, where the expertise or relationships of certain members of staff are key to the ongoing performance of the business.
7. Growth strategy
Polishing and communicating your ‘vision’ for the business is perhaps the most difficult part of the preparation process. It is essential that you are convinced by your own strategy; if you are not, neither will your buyer be. It is important to understand if the business can support growth, or would there be an investment requirement in people or systems to support further growth.
The current tax regime is favourable for business owners considering exiting the business, with entrepreneurs relief enabling shareholders to extract capital at a 10% rate (up to £10m), rather than at the typical capital gains rate. This has the potential to change in the future, so being aware of the current tax rules will help business owners extract capital as efficiently as possible.
Exiting a business is a big decision and it is important to find experienced advisors that you can trust and work alongside. Corporate finance advisors will help maximise and maintain value, whilst good legal advice will ensure the best structure and advise on potential warranties and indemnities a buyer might look to put in place. Good advisors will allow you to…
10. Keep running the business
The biggest piece of advice is to remained focused on the day to day operation of the business and not let an exit process become too much of a distraction. A decline in trading performance will lead to a price reduction at best and be a deal breaker at worst.
Blog by Chris Summerscales.
Chris is a Director in the Seneca Partners corporate finance business and has over 14 years of corporate finance advisory experience. Chris works primarily with SME shareholders and management teams, advising on raising finance, acquisitions and exiting the business.