Read our previous Family Business Focus insights
Author: Matteo Timpani, Partner, Corporate Finance
There comes a time in the lifecycle of many businesses where owners will want to consider their exit options. This is often with one eye on retirement or a new challenge. A trade sale can be seen as an ideal exit route for shareholders who have nurtured a business for many years and now wish to move away.
Generating value from a sale can be a challenging, complex and time consuming. However, if well managed it can generate a significant capital sum which can provide financial security for the owner and future generations.
To maximise both the value and the chances of success there are several areas to focus on. What follows is not an exhaustive list.
The chances of selling the business at all, let alone for an acceptable value, are significantly reduced if a business is unable to operate without the owners working full time. If key relationships are held by the owners and, only minimal management roles are delegated, then the likelihood of the business being able to survive a transfer is significantly reduced.
Many investors and strategic buyers look for ‘upside’ - that is a business capable of being scaled up. It also needs a competent and energetic management team to deliver future growth. If a business has management succession issues, or obvious limitations on its ability to grow, then the value to a third party is reduced. While some buyers are open to taking on these challenges, they are rarely prepared to pay a full valuation for taking on this additional risk.
Plan succession early! Owners should ensure the business can operate and thrive in their absence. Oversight and strategic direction can still be provided, but day to day jobs need to be delegated to an appropriately incentivised management team.
Consider equity incentives for key management so they can participate in the successful exit. If the management and owners’ goals are aligned, the chances of a successful exit transaction are greatly increased.
Investors or strategic acquirers will undertake detailed due diligence on a target company to assess risk, quantify liabilities and justify the acquisition price. If a company does not prepare regular management information, it raises questions about how well the business is run. It also makes the process of due diligence more challenging and increases the risk of a late-stage price reduction or even deal failure.
At least two years prior to a planned sale, owners should ensure the business generates regular, timely and high quality management information. This allows analysis of performance, trends and growth opportunities. Monitoring business outcomes against budget and historical comparisons improves management’s ability to take effective business decisions.
While some owners may consider this unnecessary, having this information will help the chances of a successful transaction as new owners need to be able to assess performance.
The operating style and structure of a mid-market business is often geared towards creating a successful lifestyle for the owner. The needs of an external investor are quite different.
Significant personal expenditure, while seemingly harmless, can cause tax complications and frustrate a sale process. A lack of formal legal employment contracts are problematic as staff loyalty can be one of the most valuable assets not recognised on the balance sheet. Overly complex group structures and legacy minority holdings are distracting and needlessly raise uncomfortable questions. These are just a few of the many issues which should be tidied up.
Well in advance of a sale process owners should prepare their business as if it was going to be sold. This means rationalising the group structure to what is necessary and which will best appeal to a potential buyer. It also means a review of all contracts to ensure they are up to date and capable of transfer.
Putting operational best practice in place ensures that when the time comes, a business can enter into due diligence knowing that it is well prepared for a sale. To achieve the best outcome the tax implications of the equity structure should be considered well in advance. This could ensure maximum advantage is taken of the available reliefs such as Business Asset Disposal Relief and/or tax free disposals to employee ownership trusts.
The stress and personal time involvement involved in selling a business cannot be underestimated. The process can be a massive distraction, crippling management teams if a business is not properly prepared.
Owners should never be afraid to involve advisors to support the process of getting ready for a sale. The more formalised a business is, the easier it is to sell.
If you are considering your options, thinking about selling your business or simply want to discuss the choices available, please speak to your usual Crowe contact or to one of our Corporate Finance professionals who will be pleased to talk at any time.
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