Preparing Your Business For Exit

In this guest article, Myles Hamilton, Director – M&A at corporate finance advisory firm Shaw & Co, discusses how to prepare your business for exit.

Exiting your business is the biggest moment of your journey as an entrepreneur; the chance to turn all your hard work into cash and secure your family’s financial security.

But where to start? The first thing to say is that you should never, ever, exit your business without seeking the advice of an experienced corporate finance advisor. An advisor can add a great deal of value – in one case we doubled the consideration paid – and our involvement means the deal is much more likely to complete. Far too many deals fall over because of poor preparation and the lack of an advisor dedicated to managing the process and pushing it forward to completion.

Secondly, take time to consider your ‘magic number’ in terms of valuation. What capital sum would you need to do everything you want in life post-exit – from bills to bucket lists? Have this in mind as you will only sell your business once.

Finally, keep in mind that you want a buyer who shares your goals in terms of the business, the culture, the employees and its future. You want to leave a legacy and look after the loyal employees who have played such a huge role in your success.

So what are the various options when it comes to exiting a business?

i) Trade Sale

This is the most common route but it is extremely important that you do not simply accept your first offer. The aim is to either get a price at the top end of your range to sell the business off-market or run a process to find the best buyer. Furthermore, it is also vital that you have a corporate finance advisor creating a ‘Fear Of Missing Out’ amongst potential buyers, persuading them that this is a huge opportunity that simply cannot be missed.

ii) Management Buyouts (MBO)

Here you are selling your shares in the company to the management team who can fund the sale themselves with debt or by partnering with private equity. Another option is the business owner can loan the management team the money to buy the business and they pay it back from future profits. On the downside, the price tends to be lower than running a competitive sale process to strategic buyers.

iii) Employee Ownership Trusts (EOT)

An EOT is particularly good for people-based businesses as it demands concerted buy-in from the employees who will all become shareholders in the company. This not only incentivises staff but provides the seller with a defined legacy. It can also be highly tax-efficient. On the downside, the consideration is paid out of future profits so you could be waiting a while for your money, which may also be less compared to a trade sale. Plus, of course, getting paid is also contingent on the business’s continued success.

The Process

A good advisor will invest time in preparation and package up your business to make it as attractive as possible to a good range of trade buyers or to present its true value for an MBO or EOT.

It is important that there are no hidden surprises in a deal so buyers – even if they are your own management team – know exactly what they are buying right from the outset. You don’t want anything major emerging down the line in due diligence as by that time you have lost a lot of control on the process. In addition, maintaining confidence is key to getting to completion, so you must build and maintain a foundation of trust with the buyer.

Never forget that whatever option you choose, doing a deal is a complex and lengthy process involving hundreds of ancillary documents and legal due diligence, so be prepared for the long haul. It also requires compromise!

Freedom

Finally, it is important that you have a plan for life post-exit. You will almost certainly have more money than you have ever had before – in cash. The critical thing is not to do anything rash and to work closely with a trusted financial adviser to put in place the building blocks that will secure the future for you and your family. After all, you’ve earnt it.

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