Exit strategy: Preparing for sale

  • Sep 2014

As experts in maximising shareholder value, we were asked by Real Business, the leading UK title for high-growth businesses and entrepreneurial SMEs, for our opinion on planning a successful exit strategy. Part three of seven – how to prepare your business for sale?

Implementing a considered pre-exit preparation programme can materially improve the probability of completing a company sale on the most attractive available terms within a desired timeframe.

While the mergers and acquisitions market is enjoying what feels like a sustainable recovery, having a business that is ‘match fit’ also means that shareholders can seize the moment should an approach for a business be made. As recent turbulence on the stock markets has shown – where IPO windows open and shut with alarming unpredictability – being ‘ready to go’ means optimal flexibility.

Most importantly, effective preparation for an exit should also results in a business performing to its full potential – which means that not selling may become a viable Plan B – always a good place to be when assessing offers for your business.

Key value drivers include:

The right home for the business

The biggest driver of value for any business will be your ability to identify and engage with a carefully qualified group of trade buyers or investors for which the purchase of your business represents an important step in executing their own strategies, whether it be acquiring new proprietary technologies, market share or a platform for growth in a new territory or sector. Better still if they can reap the benefits of cost or revenue synergies.

Many entrepreneurs admit to a degree of ‘tunnel vision’ when thinking about potential acquirers – the heavy day-to-day demands of their business often make it difficult to step back and consider where buyers or investors might come from. As a result this is perhaps the most common reason for engaging expert M&A advisers with the experience, international reach and industry sector insight to bring the universe of buyers to your doorstep.

Sustainable year-on-year growth

It is hugely beneficial for a business to be able to demonstrate a steady and sustainable year-on-year increase in revenue – but most importantly profit. As we emerge from the recession of 2009 to 2013, a growing number of entrepreneurs can reflect on ‘recovery growth’ in 2012 and 2013, can point to that recovery being sustained in 2014, and are looking to 2015 with a high degree of confidence that this will continue. This is giving owners the confidence to consider a sale – while more importantly giving acquirers the peace of mind to open their chequebooks more enthusiastically. From experience, the best time to sell is rarely when the business is already hitting peak performance but rather on the way up. Put simply always leave some gold in the ground for the next guy!

A strong management team

Having a strong, proven management team on board who fully support your exit strategy is a key component to the successful conclusion of a transaction, especially if you are planning to depart shortly after the sale. Your pre-sale action plan should ensure that you have a management team in place running the business day-to-day for a minimum of 12 months prior to the process commencing. Acquirers generally (and investors always) regard management as a vital component of a business’s value and therefore will insist upon the comfort of seeing an incumbent team that is committed to staying with the business. It is not uncommon for this commitment to be formally linked to a ‘earn-out’ as a form of insurance policy for the acquirer and a quid pro quo for a vendor looking to exit quickly.

Anticipating due diligence (‘DD’)

Later on in the sale process, your business will be subjected to a forensic level of scrutiny by the acquirer or investor and its DD advisers. This process is both burdensome and distracting – at a time when you need to be firmly focused on driving the business’s trading performance.

In certain instances, commissioning ‘vendor DD’ ahead of the sale process commencing may be advisable. Generally this is appropriate where the business has been recently reorganised or is recovering strongly from a difficult period, or where the likely buyer is a private equity investor (and therefore with no direct experience of your sector). However, vendor DD is not always necessary so do not be persuaded down this costly route unless there are sound reasons for doing so.

You are strongly advised to start working on a ‘Data Room’ – generally via a secure online facility. This must be populated with all the information, analysis and documentation that an acquirer is going to need to review before completing the deal. Best to work with your adviser to anticipate the collection and collation of this information early on – and not find yourself hunched over a photocopier on a Sunday evening when you should be discussing five year strategies with your buyer.

Skeletons in the closet

Every business, however well managed, will have encountered commercial or shareholder issues that remain unresolved at the point of sale. These can range from employment tribunal claims to on-going litigation to poorly implemented tax mitigation schemes. If you have such ‘skeletons in the closet’, be open from the outset with your advisers who can tell you whether or not they will present an obstacle to maximising value – or to doing a deal full stop. Few issues are insurmountable. If there are issues, always assume that DD will unearth them and so always ensure they are dealt with confidently and pro-actively when there is still a competitive tension.

It’s net proceeds that matter

Ensuring that you make full use of the available capital gains tax regimes is simple common sense. The UK’s Entrepreneurs Relief provides a particularly benign regime for qualifying shareholders but you should appoint an experienced tax adviser to make sure that everyone that can benefit from this will do so. As indicated above, poorly executed tax schemes or a slapdash approach to compliance can make or break a sale, so:

Attend to ‘tax housekeeping’ in the 12 to 18 months prior to a sale to ensure that simple compliance issues or planning steps are not overlooked;

  • Pay specific regard to Entrepreneurs’ Relief;
  • Consider how you might incentivise your senior managers with equity under HMRC approved schemes so that they also might benefit from CGT reliefs (rather than pay higher rate income tax); and
  • Ensure that you further minimise your potential CGT bill by working with a wealth manager to develop an appropriate re-investment strategy.

The most successful preparation programmes start with a focus on building a business’s gross value through demonstrating sustainable growth and profit improvement but should also boost its net value through a conservative but proactive approach to tax planning.

Part one: When and Why you should consider exiting your business
Part two: Alternatives to an outright sale.


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