Choosing the right exit route is influenced by various factors, yet the most important one is often overlooked - advanced planning.
Having nurtured a business over a number of years, finding the right exit to realise the financial gains from your hard work can be a tricky process.
As with all aspects of managing a business, planning ahead is vital, particularly for business owners who know right from the start when they want to cash-in their investment. Building an exit route and estimated timing into the business plan can help the management drive the business in a way that enables it to capitalise on the exit opportunity when it arises.
Planning
Preparing
for sale
Having decided to exit from the
business the "grooming process" begins. An objective assessment is required
of the entire business to gain a better idea of its sustain-ability, and of any
investment needed to maximise the sale valuation. In particular, you should consider:
- Development of management - does sufficient experience/expertise exist in all key areas, and is additional training required to enhance efficiency?
- Systems and control mechanisms - is the technical and control infrastructure sound? Are IT systems robust, and is data managed effectively?
- Contracts with customers and suppliers - how secure are your relationships with key trading partners?
- Is there any outstanding litigation against the firm? Is the relevant legal documentation all up-to-date and accessible?
- Key employee contracts - do you need to tie key management in to the business, and what are their notice periods?
- Pension scheme - is it fully funded with all relevant documentation in place?
Consulting an independent advisor at this stage may help you identify other areas that require specialist input. Compiling a "key issues questionnaire" can help evaluate your customer base and organisational structure, and assess crucial areas such as health and safety, employment, tax, VAT, payroll and expense payment methods, NICs and PAYE.
Businesses that trade internationally should take particular care when divesting of overseas subsidiaries. Advice should be sought on complex matters such as transfer pricing and compliance with local legislation. The impact of political and currency risk should also be taken into account.
Valuing your business
Be realistic
about current market conditions and do some research. Your advisor may have access
to transaction databases, recent trade sales over defined periods and listed company
valuations. Kavanagh Financial Services LLP offers a full business valuation service.
Identify possible acquirers at an early stage by assessing actual and potential competitors. Your advisor can make confidential approaches on your behalf to ascertain the level of interest in your business and the potential market valuation.
Once the valuation has been established, you'll need to map out the tax implications so that you can take steps to minimise your liability. Remember, maximum business taper relief can be achieved when disposing of a business asset owned for more than two years.
Having worked through each stage of preparing your business for sale, and identified one or more potential purchasers, you should now be in a position to begin negotiating your exit - and dreaming about what to do with the proceeds.
The influencing factors
Clarifying the goals of all interested parties will drive the way you sell your
business, the terms and timing, and the involvement you may wish or need to retain.
Issues to consider include:
- Personal ambition - are you cashing in to fund your retirement, change your lifestyle or raise money for a new venture?
- Family members - what investment do family members have in the management and ownership of the business?
- Emotional
commitment - how easy is it to relinquish the reins, and what sale conditions
do you want put in place?
- Future prospects - good
growth prospects enhance the business' valuation and help boost a possible flotation.
- Dependence on other senior managers - how much
do you rely on key management, and what are their aspirations?
- Availability of internal funding - do you need to sell now, or can you wait a while?
The
exit routes
Depending on the interaction of the above factors, the most
common forms of exit are:
- Passing on the business to other family members.
- Partial exit through a management
buy-out.
- Flotation through one of the public markets.
- A sale to trade or financial investors.
- Winding up the business and returning assets to the shareholders, if the business is asset-rich or if other routes are unavailable.
The most
realistic option will take into account the aspirations of the vendor, the characteristics
of the business and the prevailing conditions in the marketplace.
