How to start planning for a business exit to maximise value
Posted: Tue 1st Sep 2020
Getting the best outcome from selling a business requires careful planning. Whether you plan to hand it over to family members or sell to your team or an external party, it can take several years of preparation.
This article looks at the four main areas to consider, from defining your ideal outcome and how to start the conversation to achieving the highest possible valuation.
We advise that anyone considering selling their business should seek independent legal advice.
If you're keen to learn more, the free Amazon Small Business Accelerator e-learning includes a two-part module on selling your business. Sign up for free here or, if you're already an Enterprise Nation member, use your dashboard to access the e-learning.
1. What do you want to happen to your business?
The first step is to understand what you want from selling your business. This will help define what kind of exit is best for you.
How much money do you want?
The price your business achieves is based on what people are prepared to pay. However, your financial expectations impact how you approach the process.
For example, you may decide to take less money to guarantee an outcome for employees. At the other end of the spectrum, you might be prepared to significantly change how your business operates to build value.
Remember to check the tax implications and how much you'll be left with when figuring out what you want to aim for.
Who do you want to run the business?
Think about what you want to happen to employees because it will impact negotiations and may impact the type of sale you choose.
If your business is being absorbed into a larger entity, it's possible to ensure employees are guaranteed roles in the new organisation. You may be happy for it to wind down or hope it's in the family for generations.
How much do you want to be involved after the sale?
It's common for small business owners to be involved in some capacity after an exit because part of the value is wrapped up in your expertise and relationships.
It could be anything from a handover period of several months to a year or more. There are even situations where business owners sell a majority stake and remain in a senior role indefinitely.
2. What are the main types of business sale?
Understanding what you want from the business sale will help decide what kind of exit to aim for.
Here are the main types:
Succession: Pass your business on to a family member
Management buy out: Sell to employees
Third-party sale: Sell in the open market, often to a competitor (strategic buyers)
Asset sale: The buyer acquires the tangible (property, stock etc.) and/or intangible (intellectual property)
3. Research the market
It's helpful to look at deals in your sector and area. Regional publications share the top-line details of acquisitions and can be found by searching Google News.
Businesses do PR in the run-up to an acquisition. Looking back at their press clippings provides more details on the goals. Larger companies will have to provide information to Companies House, which can be searched for free.
Brokers will be able to provide more information.
"Get valuations done at suitable times," added Paula Tomlinson from On The Spot Tax. "Your market and the business will change. This could be every year on your three-year path to being acquired."
Paula presents the free Amazon Small Business Accelerator e-learning modules on selling your business.
4. Starting the conversation
Talking about a possible business sale creates a risk that employees become disillusioned or customers find alternative suppliers; it needs to be managed carefully.
Talking to shareholders and directors
Shareholders and directors have to be consulted during the process.
"You should discuss your ideas and plans at appropriate times with your fellow shareholders and directors," Paula advised. "You need to keep them on board and make sure they're suitably motivated. You don't want people leaving at the wrong time."
Talking to the senior management
Think carefully about when to talk to senior managers. It's possible to get buy-in early and this means you can set targets that drive you towards the exit. But expectations need to be clearly defined.
Telling the team
It's unlikely you'll share the news with your team until a deal has been agreed.
5. How will you realise the value in your business?
It might be that you knuckle down for a year to get things ready for an acquisition. If you start planning earlier, you can achieve a higher valuation because you can allocate resources more effectively.
For a buyer to get long-term value, your business needs to be defensible. What makes it hard for other businesses to compete with you? How strong is your USP?
It's different for every sector, but intellectual property, multi-year deals, a strong market position and an engaged subscriber base all make businesses more valuable. Try to identify areas that can be improved in the run-up to exiting your business.
Don't be too reliant on a small number of customers. It increases the risk for the acquiring business and they're unlikely to be interested if your sales are dominated by one or two companies.
If you're selling to other family members or existing managers, it's more about developing the people and culture:
Identify the people that can take the business forward. Make sure they get the training needed.
Make sure your customers know these individuals.
Good housekeeping will make acquisition planning and the conversations you have with suitors easier.
"You want to paint a picture that you're running a business well," said Paula.
Try to keep the following up to date:
Forecasts
Management accounts
Statutory hygiene (Companies House and HMRC)
Terms and conditions
Deal with bad debt
Whatever type of exit you want, effective planning is essential.
If you want to learn more, Enterprise Nation is offering a free online learning course on selling a business as part of the Amazon Small Business Accelerator.
Click here to sign up for free or log in to your dashboard if you're already an Enterprise Nation member.
All of the content provided within this blog post and e-learning (whether provided by Amazon or Enterprise Nation) should be treated as general guidance. It is not tailored to your business or circumstances, and should not be relied upon as specific recommendations or legal advice. If you require specific advice, recommendations or assistance for your business, you should seek your own independent advice from professional advisers.