YOUR BUSINESS EXIT STRATEGY

INTRODUCTION

  • This guide sets out the basic principles of what needs to be considered by an SME Owner. Each transaction is different which is why the appointment of Advisers is important.
  • The text is relevant as at publication date of 4 January 2021, but the continuing level of volatility experienced in the SME business environment may change perspectives: prevailing tax concessions for SME Owners are on the cusp of changing in 2021/22.
  • It is important to plan early.
  • Whilst the pressing issues of illness or divorce may dictate an urgency to sell up, ideally a measured approach to Selling your business will be more financially rewarding.
  • This is why Avocet introduced the 1 = 4 Increased Business Value  programme in 2014 to help Owners plan their exit & remedy any perceived Value weaknesses, to achieve a better Exit Price.

 

ABOUT AVOCET INVESTMENTS

  • Avocet was established in 2001 to help SME Owners typically in the 500k-£5m turnover range, with sourcing finance, business advice, & selling Owner’s businesses.
  • Over 20 years Avocet has sold over 50 businesses, including 13 Management Buy Outs, across 29 industry sectors.
  • One client used Avocet for 2 Management Buy Outs & an acquisition search before finally selling out to a PLC.

 

BUSINESS MARKETABILITY

  • Is your business READY to be sold?
  • Have you got a Management Team or are YOU the business?
  • Is the level of Profitability & Cash Generation attractive?
  • How high is the level of debt?
  • Is there a Directors Loan Account to be repaid?
  • Can you readily extract the level of information that a serious buyer will want about your business, for them to decide on whether to buy, & then at what price?

 

EXIT OPTIONS

  • There are 5 main Options to consider dependent on your market sector, your Management Team, your personal circumstances, & your appetite for risk.
  • A TRADE SALE whilst obvious may not be necessarily appropriate. The size of transaction may be too small to attract interest or the sector may have no participant with the funds to proceed. Moreover an expression of interest may only be to extract pertinent information, although covered by a Confidentiality Agreement, or the buyer motivation may be to buy the turnover & strip out all costs including your loyal staff.
  • A MANAGEMENT BUY OUT (MBO) which will need a competent Management Team with an entrepreneurial spirit & capability for attracting funding. Often because of the challenge in raising the purchase price for the business, an MBO offer will not be the highest, with the price paid over an extended period
  • An EMPLOYEE OWNERSHIP TRUST has under the current tax regime, considerable tax concessions for the exiting owner, but this route has tended to polarise the opinion of advisers. The main reason apart from tax benefits, for adopting this approach will be the lack of funds of the Management Team, who will then pay you on the drip over an extended period of time. This exposure to extended payment is exacerbated by employees beyond the immediate Management Team being shareholders with a perceived “right to a job” which may impede effective management.
  • GENERAL MANAGER TO REPLACE YOU, to allow you to “retire” whilst retaining 100% business ownership. Although this may have its appeal & could in time lead to the development of a competent Management Team for an MBO, SME Owners may not like handing over the reins & taking a back seat whilst still the Owner.
  • PRIVATE EQUITY PARTICIPATION, where a funder specialising in your size of business & with an interest in the sector, may take a minimum 30% stake with a plan to purchase the remaining 70% at an attractive price if various performance thresholds are met. Dependent on the strength of your Management Team thismay mean that you have to work on. Deal structures are bespoke & will vary according to circumstances.

 

FINDING A BUYER

  • Finding the right buyer takes considerable effort & is time consuming, involving a lot of research looking for prospective buyers to approach.
  • The search will not only be about is the prospective buyer interested & has the necessary funding, but also about his/her future plans for the business.

 

PRICE  &  DEAL STRUCTURE

  • Many SME Owners confuse what they want/need with what the business is worth, meaning there is often a gap of disappointment.
  • Ultimately the business price is judgemental & dependent on what an interested party thinks it is worth to them, & can afford to pay.
  • Contributory elements to calculating Value are Size, Cash Generating Qualities, Growth Potential, Management Team, level of Indebtedness.
  • In deciding whether an offer is the right one for an Owner, it is important to stress it is not only about Price. Other important considerations are when will you get paid, whether the transaction is tax efficient, & how long the buyer wants you to continue in the business for continuity, post transaction.
  • Your Advisers’ input will be critical here.

 

ADVISERS

  • For arguably the most important financial decision of your busines life it is vital to seek appropriate professional advice.
  • A BROKER who is experienced in successfully selling businesses of your size, & who adopts a research driven proactive exercise rather than a mud against the wall online approach. A caution against high overhead London located brokers, some of whom are franchise operations, where the franchisee may not have appropriate experience.
  • A SOLICITOR who is equally experienced in completing transactions for businesses of your size, & who arguably adopts a pragmatic approach on your behalf.
  • PROFESSIONAL TAX ADVICE to ensure the main beneficiary of your transaction is you, not HMRC.

 

FEES

  • It is important for you to establish the scale of Adviser fees at the outset, to avoid any nasty surprises later.
  • In the case of the BROKER there should be a Proposal for you to review, detailing the Key Issues which might affect a transaction, what will be done on your behalf, & the fees which are usually structured in 3 phases: an Engagement Fee, a fee for reaching Heads of terms which is the broad terms of a transaction agreed between the parties, which can then be worked up into Legal Documents, & a Success Fee for completing the transaction which is usually a % of the Sale Price.
  • Any reputable SOLICITOR will discuss the potential transaction with you (at nil cost). Then a report highlighting what he/she believes has to be done & fee estimate, will be sent to you for your review & if acceptable, for your official Instruction.
  • Similarly you should discuss & obtain a fee estimate for your Professional Tax Advice.

 

WHY BUSINESSES FAIL TO FIND A BUYER

  • Not all businesses are sold at the first attempt
  • Avocet’s experience over 20 years is that the main contributory reasons for this are:
    • Lack of Owner engagement in the process, meaning data made available to prospective buyers lacks quality & is made available erratically: the sale process should be about continuing momentum.
    • Sudden adverse trading making a sale less appealing.
    • An Owner changes his/her mind.
    • Unrealistic price expectations.
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