A guide to successfully exiting your business - Things to consider when selling your company
Friday 6th August, 2021
What do you need to consider when selling your business?
I am frequently asked this question by clients who have been incredibly successful in building their business, but have given little thought to how they will eventually exit the business or what a successful exit will even look like. The reality is that selling a business can be as fraught with pitfalls as the actual process of starting the business up and making it profitable.
I have therefore put together this guide which takes an in-depth look at:
• When you should start planning your business exit
• Your objectives when selling your business
• Your options when selling your business
• How to make your business more attractive to buyers
• How to value your business
• Which advisers and professionals you should talk to and how they can help
• How a financial adviser can help with your pre and post exit planning
I hope you find this guide useful, but if you have any questions, please don't hesitate to get in touch with us. We are always happy to help and have a broad range of contacts with other experienced professionals we can put you in touch with, who can make a huge difference to the eventual outcome of the process.
For many people who run their own company, the question of how to exit the business is the last thing on their mind. Their time is taken up with the day to day running of their venture and ensuring that it becomes a success.
Building a successful business takes huge commitment and sacrifice. There are long hours, worries about whether the business will succeed, all sorts of deadlines and, almost inevitably, time away from loved ones and missing important family milestones.
However, there is a reason for doing this. Many of us who run our own businesses do so, because we want to do things differently. We have a dream of building something successful and life altering that we can be proud of. We also know that, if we are successful, the business will be able to provide a quality of life and a legacy for our family that would simply not be available if we continued to work for somebody else.
For the majority of us, building the business of our dreams is a lifelong effort. It starts with having an idea, then building up the money and support to allow you to pursue your dream. The costs of starting up are not insubstantial in most industries. Eventually the day comes when your doors are ready to open.
The first few years are where the rubber hits the road. Your ideas and beliefs are tested. Many of your ideas fail and fall along the wayside or have to be adapted to be more practical. There are sleepless nights and frenetic days of work. There are certainly dark hours filled with doubt, but then there are those moments that you will never forget, like your first client, your first positive review or the first year the business turns a profit. All these little memories and milestones mean that eventually the business is a fundamental part of you and reflects all your personality, goals and ambitions.
Despite all the blood, sweat and toil, there comes a time for every one of us, that we need to decide whether we should call it a day. This could happen simply because we have reached an age where we want to start reducing our working hours to spend our time on more important things like spending time with family or hobbies. Others may receive an offer for their business which is simply too good to refuse. Or it may just be the inner serial-entrepreneur who wants to move on to a new project.
The number of business owners facing this decision is pretty high. According to research by accountancy firm Moore Stephens, the average age of directors of UK small businesses in 2016 was 54.5 years old; two-thirds of the directors were over the age of 50 and 33% were over 60. This means that it is a safe bet that many directors and company owners are wondering whether they should exit their business and, if so, what shape the exit should take.
This assumption is supported by Smart Support (Blog - Smart Support) who found that 70% of business owners in today’s market plan to sell or pass their business on within 10 years, yet 76% don’t have an exit plan and many do not even know the value of their business. As we mentioned above, the demands of running a business leave little time for anything else. It is often hard enough to keep your business running successfully, without having to add the additional burden of putting together an exit plan.
I have therefore put together this article with the aim of providing business owners with some guidance on some of the things they should be considering as they plan for exiting their business.
In this guide I will cover the following areas:
- When should you start planning your business exit?
- What are your objectives when selling your business?
- What are your options when selling your business?
- How to make your business more attractive to buyers
- How to value your business
- Which advisers and professionals you should talk to and how they can help
- How a financial adviser can help with your pre and post exit planning
When should you start planning your business exit?
There are a number of different views on this, but the general consensus is that you should be putting your exit plan in place at the point when you start the business. Even if you are not planning for exit, a well-run business should have the most important details easily to hand, such as:
- A clear business plan for the next 10 - 15 years
- Projections for future returns and business growth
- Clear and accurate accounts
- An accurate record of historical performance relative to past business plans
If you have these available, then pulling together an exit plan and a proposal that is attractive to buyers, is far easier. However, judging by the statics mentioned earlier in the article, this level of organisation is often not present.
It is important to remember that the decision about when to exit the business is a very personal one and is based on your individual preferences, as well as your financial and personal goals.
Your intention may be to build the business up to a particular size or value before leaving. This may be because you want to ensure that the business is properly established and capable of surviving without you, so that you can comfortably phase yourself out of the business. Or it may be because you will need a minimum level of return from the business sale to allow you to retire comfortably or start your next project.
In this situation, you can look at your business plan and your growth projections and make an estimate of when you are likely to reach that goal. You then need to start planning for that point at least 5 years before hand. Some commentators think that 2 years is enough, however, 5 years gives you time to recover from any unexpected occurrences that may affect the value of your business during that time.
Alternatively, you may have a specific age in mind for exiting, based on your desire to retire. For example, you may want to leave the business at age 60. You would then ideally look start the process of planning, talking to advisers and beautifying your business at least 5 years before that point.
Quite often, business owners are taken completely off guard by interest from a potential buyer, that comes out of the blue. Up until that point, the business owner was not even remotely considering selling their business. If this happens, then all talk of careful planning goes out the window. In these circumstances, it is generally a case of all hands-on deck to get everything shipshape for the negotiations. In these unexpected cases, having a good set of accountants, lawyers and corporate advisers around you is invaluable and can make the difference between a mediocre valuation and a life changing valuation.
The best suggestion I have heard about preparing your business for exit is from a corporate adviser who told his client that they should run their business as if they were waiting for the apocalypse. You are not sure when it is going to happen, but until it does, it is best to stay prepared.
What are your objectives when selling your business?
Understanding your objectives for exiting your business is crucial. It forms the basis of the next stage of your life and therefore helps to determine what your minimum requirements are from the exit. In the paragraphs below, I will highlight a number of things to consider when determining your objectives for leaving the business.
Funding the next phase of life
For the majority of business owners, the key objective is to secure a deal that will provide them with financial security and allow them to either retire or start their next project. It is therefore really important to determine how much you will need from the sale of the business in order to provide you with sufficient money to make the next phase of your life a reality.
When considering this amount, it is important to go into as much detail as possible.
- How much will you need to fund your retirement/next project? Have you factored in the impact of inflation and unexpected expenditure?
- What level of cash reserves will you need?
- Do you have any financial dependents or obligations and how much will it cost to maintain these?
- Are there any one-off projects or financial goals that you have that will require funding?
A personal financial adviser will be able to help you clarify your future requirements and model how much you will need to make your goals a reality.
This minimum amount of return provides you with a floor, below which you cannot go. You know that if you receive the agreed minimum level of return from the sale of your business, then your financial future is secure.
When determining this amount, it is important to be realistic and also important to take into consideration the impact of taxes. A good accountant can really help in this situation. A corporate finance specialist will also be able to help you determine how realistic your asking price is.
Who do you want to take over your business?
There are a number of options available for exiting your business. In the next few paragraphs, I highlight some of the most common options and what they entail.
A trade sale – This is where your business is purchased by one of your competitors working within the same or a similar industry. Selling to another business is generally the option that provides the best financial settlement, particularly if there is more than one buyer competing to purchase your company.
However, selling to another business can be quite daunting for a business owner, particularly if the buyer is intent on doing things differently. The potential implications for staff are always a consideration, particularly if there are likely to be lay-offs. At the end of the day, a business owner may baulk at the idea of a trade sale if it means that their business legacy will simply be absorbed into another company.
If a trade sale is the direction you are planning, then there are a number of potential sources to find willing buyers. Corporate financial advisers will often have a list of potential buyers available. Trade magazines may also be a potential source of buyers. It goes without saying, that the more prospective buyers you are able to find, the better your chances are of getting the financial settlement you are looking for.
A Management Buy Out - A management buyout (MBO) is a transaction where a company’s management team purchases the assets and operations of the business they manage.
This can be a really useful option, particularly if the management team are keen and also have been helping to run the business successfully. The management team will know the business inside out and can also ensure that the business retains its character. Assuming you have chosen the bulk of the management team, they should reflect your goals, principles and ambitions for the business.
If this is a route you would like to pursue, it is important to discuss it with your management team, being careful to lay out the options clearly, while also not raising false expectations. They will need to find finance for the buyout, as it is normally pretty unusual for the individual members of the management team to have the funds readily available in their personal capacity.
There are a number of options in terms of financing with the most common avenues being bank lending or private equity input. Funding from private equity for an MBO will normally require a minority equity stake being given to the private equity firm. This is an important consideration when considering the best way to finance an MBO.
In an ideal world, the business owner would like to get paid the full consideration at legal completion of the transaction, however this is not always possible and depending on the funding arrangement, it may be necessary for the consideration to be paid in annual increments, with the management team purchasing a part of the business each year. In this situation it is crucial to ensure that you take legal advice. It is important to get an agreement in place that commits the management team to purchase the whole business. It is also important to take tax advice on the tax implications of any settlement and the best way to structure the deal.
Family succession - This may often seem like an obvious option for many business owners, particularly if your family are employed within the business. But it is crucial to ensure that the person/persons you are passing ownership to, are actually capable of running the business and are keen to do so. Remember, when you pass the business to them, it is not just their future you are gambling with, but also the future of all your employees.
It is also important to take advice on the tax implications of passing over ownership of the business and legal advice on the best way to structure the ownership and shareholdings, as well as the most effective way to transfer the ownership.
Employee ownership trust - An employee ownership trust (EOT) is a method of share ownership whereby a trust is set up to acquire and hold a majority stake in the company in question, and to hold those shares on trust for the benefit of all that company’s employees. No employee directly holds shares or a particular stake, but instead is in line to benefit from the growth and profits of the company in the future.
EOTs arose out of a desire to increase employee ownership of companies. There is a growing body of evidence that shows that giving employees a stake in the performance of the business increases profitability, business resilience and employee engagement and satisfaction. In an attempt to grow the number of employee-owned firms, the government is even offering tax incentives to business owners who pass ownership of the business to their employees via employee ownership trusts and under certain circumstances it is possible to mitigate the Capital Gains Tax liability on the sale of the business, saving the business owner from a 20% Capital Gains Tax liability on the profits of the sale.
While it may sound like a simple and potentially tax beneficial solution, there are many possible pitfalls and it can be very complex. Remember, the EOT has to effectively buy the shares from the business owner. However, the EOT has no assets of its own to do so. Therefore, the EOT will need to borrow the funds from somewhere. However, it is difficult to find funding in this way as the EOT has no assets to act as security for the borrowing.
Alternatively, profits from the business can be passed to the EOT over time, in order to allow it to pay the business owner for the company shares in increments.
While this may be the perfect solution for some, it is important to ensure that you take advice from a competent legal professional or corporate finance specialist, in order to ensure that you avoid all possible hazards and put all the necessary safeguards in place. If this is something you are considering, I have provided a link to a very informative short video on EOTs from Castle Corporate Finance, who specialise in this type of arrangement. It provides a concise summary of what an EOT is and some of the minimum requirements for entering into this type of sale: Employee Ownership Trusts (EOTs) | Castle Corporate Finance (castlecf.com)
Liquidation – lastly, you have the option to simply stop trading, liquidate the assets and wind up the business. This is not just an option for failing companies, but is also available if you want to exit the business and cannot find a suitable buyer or someone who wants to take the business over from you.
What level of ongoing involvement do you wish to have?
Once again, it is crucial, regardless of which option you choose to exit your business, that you decide how involved you want to be with the business after the sale and for how long.
This is a really important consideration, because it is not going to be your business anymore. It is often very difficult for previous owners to stomach taking orders from the new owner, particularly if they disagree with the way things are being done.
This can be a key consideration, as many business sales will include an earn out clause. Often this holds back a portion of the consideration, to be paid out in increments at agreed intervals, subject to certain targets being met. The previous owner is required to continue working at the business in some or other capacity during the earn out period, in order to help the business hit its targets. If the targets are not hit or the former business owner chooses to leave before the earn out period is completed, then the held back portion of the consideration is forfeited.
Many business owners do not mind continuing to work during this earn-out period, as they view it as safeguarding their investment. However, others find working for someone else unbearable, particularly if they disagree with how to do things. I have had a client walk out on a £3m earn out, simply because he already had enough money and couldn’t bare the frustration of watching someone else “run his company into the ground”.
For other business owners, they may wish to retain a limited role at the company. This can often take the form of an executive directorship requiring them to work a few days a month in return for an agreed remuneration.
Many business owners simply wish to cut all ties with the business after the sale.
As you can see, it is incredibly important that you decide what you are willing to accept, before entering into negotiations. If your desire is simply to cut all links and start your retirement, the last thing you want to do is end up with a deal that requires you to work a further 3 years.
How to make your business more attractive to buyers
When I was a kid, my mother always used to tell me not to buy second hand. She always said, “If you buy second hand, you get second hand problems.”
It’s the same for any potential purchaser looking to buy your business. If, when they look at your business, all they can see is potential problems that are going to cost them money to fix, then the offer they make to you is going to be reduced accordingly. You therefore need to take steps to address any problems in order to make the business as attractive as possible to buyers.
Here are a few things to consider that can make your business more attractive:
- Nothing sells a business quite like incredible performance. Now, the reality is that you cannot always control the demand for your products or services. There could be a recession or it might just be a seasonal fall in sales. However, you can always take steps to ensure that your business is amongst the top performers in your industry, regardless of the market. In an ideal world, you would be selling your business after years of consistent growth. However, if conditions mean that growth has been hard to achieve, you still want to stand out from your peers in terms of performance.
- Make sure that your management team are incredibly well trained, self-sufficient and capable of running the business without you. If you are responsible for everything in your business and no one can make a decision without you, that is going to be a big problem to a potential buyer. When you walk out the door, chances are all profitability will walk out with you. Make yourself dispensable.
- Get everything ship-shape. This means getting your accounts up-to-date. Your potential buyer is not going to be impressed if they ask for your accounts and you empty an envelope of receipts and IOUs onto the table in front of them. If you are still using that old CRM from 1998, update the system. Cut dead weight and loss-making contracts where possible and make sure that your business plan and projections for the next few years are spot on.
- Know where your next few years of income are coming from and have a really good understanding of what the threats to your revenue streams and business are. More importantly, know how you are going to counter them, if they happen.
The best way to approach this is to ask yourself what you would want if you were looking to buy a business. What would be unacceptable to you and what would cause you concerns? If you anticipate all of these requirements and are able to answer any potential buyer’s questions positively, you will put yourself in a strong position.
How to value your business
There are a number of ways to determine the approximate value of your business. If done correctly, this can be very useful, as it can provide you with a reasonable guideline of what to expect when looking to sell your business.
My personal opinion is that it is always worth getting a professional adviser in to help with calculating the value of your business. Their experience and knowhow will help to moderate your expectations, but will also help to ensure that you don’t sell your business short.
At the end of the day, the important thing to remember is that the true value of your business is what a buyer is willing to pay for it. The rest is just a paper-exercise.
In the next few paragraphs, I will briefly explain some of the valuation methods available for determining the value of your business. Not all valuation methods are created equal and it is important to choose the valuation method that suits your business best.
This is a method that looks at determining the value of the company based on the value of its assets. This includes both tangible assets (such as property, equipment and land), as well as the value of intangible assets, such as patents and other intellectual property. In the world we live in, these intangible assets can have considerable value.
For many companies, this method will not be suitable, as it will not include the goodwill towards the business. However, this method may prove very beneficial when valuing a large property development company, for example.
This method may prove to be more useful, as it focusses on looking at how much similar businesses to yours have been sold for recently. It’s a bit like when you are looking to sell your house. The first thing you do is go on Zoopla to find out what other houses in the area have been selling for. This is a very popular approach and can give a business owner a clear idea of what a realistic value for their business. It is very easy to get an idea of a competitor’s accounts, assets and profit from their returns. Furthermore, a business owner is very likely to have a good idea of the similarities between their company and their competitors of a similar size, which have recently been sold.
I think the biggest problem with this method is the ability of a business owner to remain objective and not to look at their own business through rose-tinted spectacles. The critical thing when conducting this kind of comparative analysis is to ensure that that the comparison is valid.
Many industries have accepted practises and norms for valuing a business. Within the finance industry it is very common to use multiples of turnover to determine a reasonable asking price for a firm. In other industries, it can be down to things like volume of sales, volume of customers, number of outlets or good name.
There are other methods for valuing your business such as entry valuation and larger companies may use discounted cash flow. At the end of the day, it makes sense to use someone who really knows your industry and has experience of valuing businesses, to ensure that you get an accurate valuation.
How a financial adviser can help with your pre and post exit planning
In the majority of the work mentioned above, the most important people are going to be your advisers. These include:
Corporate finance specialists – These can provide invaluable help in finding suitable buyers, but also in understanding what the reasonable expectations can be for your business. They can also help you to make your business more attractive to buyers and help with the sale of the business through:
- Producing a sales prospectus outlining the merits of the company
- Taking time to highlight the positive aspects of your business to prospective buyers prior to negotiations
- Negotiating the sale on your behalf, which can be invaluable. They are experienced negotiators and it is a bit like hiring a prize-fighter to sit in your corner. This is particularly useful when negotiating with private equity, as they will be very experienced at getting the price that suits them
Accountants and tax specialists - The accountant generally focusses on the financial aspects of the sale, such as preparing accounts for the business and ensuring that all accounts are up to date and accurate. The tax specialist can take steps to ensure that the sale is structured in such a way as to ensure that it is as tax efficient as possible. They will also be very useful in scanning any agreement, so that they can highlight what the tax implications of the transaction are.
Solicitor – The solicitor will take care of all the legal aspects of the sale like drawing up a contract of sale. However, they will also keep an eye out for any anomalies and areas of risk so that you can fully understand your legal position upon entering into the agreement. This can often be the biggest deal of your life and is potentially life changing, so it is worth “tooling up” as they say in the parlance, to make sure that no one tries to take you for a ride.
The adviser who is often missed in all of this is the personal financial adviser. There are a number of areas where a financial adviser can help. This help falls into two areas.
- Pre-exit planning
- Post exit planning
The main area where financial adviser can help here is by helping to remove accumulated cash from the business tax efficiently prior to sale.
Cash can accumulate quickly in a business bank account and careful consideration needs to be given to determine the most tax-efficient way to extract those funds. This can be a good problem to have, but if you’re looking to exit the business, there is increased pressure to find a solution due to time constraints. When you’re looking to exit, you no longer have the luxury of staggering profit extraction over several tax years. One of the most tax-efficient ways for business owners to extract cash is by maximising their pension allowance and making pension contributions via the business. Contributions made via a business are a tax allowable expense, and so not only can you build your pension wealth, you can simultaneously reduce your corporation tax.
A financial adviser can help calculate the amount that can be paid into the pension and recommend a suitable pension vehicle to transfer the funds into.
There are also other vehicles, besides pensions which can be used to claim tax relief. In these situations, the business owner pays some of the funds accumulated within the business accounts to themselves as an income, paying tax on the distributions. They then invest the funds into investment vehicles like Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS), which will allow the business owner to claim back 30% of the tax paid on the income. The additional advantage of this is that a VCT will also pay a dividend to the business owner which is tax free. This can provide a very useful ancillary income for the business owner in retirement.
A financial adviser can advise the business owner on when it will be suitable to use these options and also recommend suitable vehicles to do so.
A financial adviser can also help defer the need to pay CGT on at least some of the gains from the sale of the business, by rolling the gain/a portion of the gain into an EIS. By doing this, the CGT liability on the gain can be deferred until the exiting business owner is in a better place to pay the liability, or else it can be deferred almost indefinitely, until death, when the CGT liability will die with the business owner. In addition to this, the exiting owner will receive a 30% tax credit which can be offset against income tax, potentially fully mitigating the CGT liability on the invested portion of the gain, as CGT on the gain will only be charged at 20% for higher rate tax payers.
The main area where a financial adviser can help is by helping the business owner put in place a plan that will help them use the proceeds from the sale of the business to meet their financial needs in the next stage of their life. This involves structuring an investment portfolio to ensure that all returns are as tax efficient as possible and that tax wrappers are diversified to ensure that there are a number of tax efficient income sources that utilise all personal tax allowances.
Many financial advisers have access to cash management services, which can help business owners get better returns on their cash deposits. For smaller amounts of money, this may not make much difference, but for substantial cash holdings the increase in returns can be substantial.
In addition to this, financial advisers can take steps to put in place trusts to ring fence cash and investments as a legacy for specific beneficiaries.
Furthermore, as many of the businesses sold will have qualified for Business Relief, making them exempt from Inheritance Tax, it is possible for a financial Adviser to invest the proceeds from the sale of these businesses into investments that also qualify for Business Relief, making them immediately exempt from Inheritance Tax. By doing this the financial adviser can save potentially hundreds of thousands of pounds in Inheritance Tax.
Lastly, financial advisers can manage the business owners pension assets, to ensure that they continue to grow and are managed in a suitable manner. Where the business owner uses their pension to generate income in retirement, the financial adviser can apply a mixture of annuities and drawdown to provide a secure, but flexible income. However, where the business owner is planning to leave their pension as a legacy for loved ones upon their death, using non-pension assets to fund their expenditure requirements, the financial adviser can ensure that the pension investments are properly managed and that, where necessary, a spousal bypass trust is in place, to ensure that death benefits go to the right people.
As you can see, the process of selling a business is far from simple. It can take years to prepare your business for sale, find a suitable buyer and then negotiate a deal. On top of this, there are all sorts of complications, which make the possibility for mistakes an ever-present concern. In an environment where everyone is competing for the best deal and the stakes are often very high, it is crucial to ensure that you surround yourself with a team of the best advisers you can. It may often seem expensive, but you are not paying for what you know, but rather what you don’t know. Often it has taken a lifetime to build a successful business. It therefore makes sense to take steps to make sure that you get the best deal when you eventually sell your business.
If you are looking to sell your business and have questions or concerns or are looking for guidance on good advisers that can help you complete your deal, please feel free to give us a call. We have considerable experience of helping clients who are exiting their business and are always happy to be of assistance.