Thinking of selling your business?
Whilst contemplating selling your business, have you done anything to prepare for the big day? Ideally, owners should start thinking about their exit options at least two years before it actually happens.
It is often the case that exits are precipitated by unforeseen events such as illness, an unsolicited approach by a buyer or indeed incoming changes to the tax rules. It is, therefore, pertinent that careful focus is given in advance of these unpredictable events in order to maximise value and flexibility on the type of exit. A clear vision of how you will exit will free up your options and encourage better strategic decisions sooner.
Key considerations for planning should include:
Determine your exit options
There are numerous exit options ranging from a trade sale, a sale to private equity, an initial public offering (IPO), or a management buyout (MBO). All come with intricacies in terms of how they work and their own set of pros and cons.
Put in a strong management team
If you are not planning to stay in the business post a sale, the business must not be reliant on you or this will become an instant deal breaker for a private equity buyer. A strong management team already embedded in the business is particularly critical for such buyers. Limiting the pool of buyers to trade only could reduce the competitive bidding environment.
Sell the story and show them the money
Think carefully how you articulate your brand proposition and growth story. Work through defining your business purpose, plan and profit objectives underpinning your product, culture and reputation. Support this with realistic and supportable forecasts that lends credibility to the management. To maximise value, you need to show buyers demonstrable and higher future earnings.
Make it more efficient
Look for ways to achieve operational efficiencies. Remove or restructure any unnecessary costs and lower your capital expenditure requirements in advance. This may include removing hidden non-business, family assets such as the boat or Aston Martin you love but don’t really need or other costs like your own personal PR.
Can you monetise underutilised assets ahead of the transaction? Focus on controlling expense and look carefully at ‘normalising’ shareholder expense habits in advance of a sale to give buyer confidence in your business.
Put in the process and controls
Get your finance point person to implement good processes and strong financial controls. Putting in a strong CFO or seeking professional help is a good start. Don’t underestimate how important it is to the buyer that you have solid operating functions, reliable financial statements and timely reporting.
De-risk the proposition
Consider all potential risks if you were a buyer and apply it to your business. Make the changes now and it will make the due diligence process less painful.
Don’t let your buyer get spooked and topple the deal at the 11th hour. Just when you think it is safe to put the champagne on ice, the buyer’s lawyer could present you with a raft of indemnities and warranties that make you reach for the vodka instead.
It is normal to have indemnities and warranties in a deal but you can reduce your exposure. Here are some examples:
Ensure all contracts with customers and suppliers are signed, up to date, and a proper list is maintained;
Diversify your customer base so there is less reliance on one or two key customers;
Review property leases to ensure they are not ‘holding over’ and make sure they are assigned to the correct name;
Get compliance checks and insurances in order and ensure any litigation or dispute claims are properly covered and documented.
Working capital
This is a tricky area which is difficult for owners and sometimes their own accountants to fully understand, therefore often overlooked in a negotiation. However careful management of this capital can mean additional “trapped” cash is made available to be taken out by the owners at exit. This can really add a lot to overall consideration.
Don’t let the tax man get it all
Whilst you have been focusing on maximising the value of the company have your remembered to take the steps to minimise your tax exposure? Various tax planning strategies need to considered in advance in order to reduce your exposure to capital gains tax, inheritance tax and pensions.
Be ready be organised
Yes, there is a vast amount of work and information you need to start to collate and constantly update. This will range from staff lists to contracts to board minutes to asset lists to management accounts. Making it all digital in logical folders will enable the due diligence process to be much more seamless. Consider using a secure data room which can be populated and viewed by different individuals with various access rights and the ability to track who is viewing what file.
Get professional help early
There really is a lot to do. Get a trusted advisor who has done this many times overs to save you tearing your hair out. Selling a business takes up a lot of time, but you should not really be distracted from running the business. Having someone to help you ensure matters from structuring to tax to legal are all addressed in advance will save you a lot of worry and provide you with significant savings and value that you simply cannot underestimate.