Preparing for an exit – a sellers’ guide for SMEs


Selling a company is an exciting, challenging and rewarding task. Preparing a company for sale, so that the value is maximised, can be even more challenging than the actual selling process. To help you rise to that challenge we take a look at; the reasons to sell, the different approaches to selling, how to go about finding a buyer, and some of the main issues you need to consider.

Why sell?

Ready to seek your destiny?

Ready to seek your destiny?

Simplistically, the prime reason to sell is to turn the asset value built up in the company into money and ideally to increase that value. Most companies in the UK are owner managed and so the selling process involves the owner(s) in selling to get some financial return for their efforts invested in the business. For many, it is their pension or at least a contribution to a better and more comfortable life.

For larger and in particular for quoted companies the situation is remarkably similar. In all cases, the company belongs to the shareholders so whether that is one sole owner or thousands of individual shareholders who have no other connection with the business, the reasons to sell must include satisfying the needs of a majority of the shareholders.

Sometimes the reasons to sell are based on negative forces. A common example is that the business’ future looks bleak, so selling before it goes bust probably seems like a good idea.  Another reason to sell is to divest parts of the business that no longer fit because they are in the wrong; geography, technology business, etc.  Beware of making decisions based on moving away from a negative position – selling should be a part of the strategy that you plan and prepare for – when you write a business plan for a new business, build in an exit strategy and ensure you work towards achieving it.

Approaches to selling

The main approaches to selling are:

  • Trade sale – selling all or part of your business to another company in a similar or complementary business to your own
  • Floatation – taking the company public by floating on one of the open markets, also a way to achieve funding, but at cost in terms of control
  • Management Buy Out (MBO) – selling to the existing directors, managers and key staff in the business
  • Management Buy In (MBI) – selling to an external management team who want to take over the business as it stands
  • Sale to investors – their sole interest in the business is as a means of making money so their interests and motivations are different to most other types of buyers

The thing they all have in common is they involve you selling your share of the business.  The approach that you adopt will depend on many factors and the key ones are discussed below.

Key aspects to consider

One of the most important factors to consider is how you feel about the business and the people who have helped you to build it. This could lead you to conclude that selling by MBO would be the right (moral) way to go, but you will need to consider your own position as well. Can the existing staff raise an amount of money comparable to the value you could realise through some other form of sale? Also, if you have been the strong management force in the company, have you been grooming your successor or would you be leaving the very people you like and want to help, without a strong leader at the helm of their new company?

It could well be that a trade sale or MBI would be the best option as it would give you a fair price while protecting the employees by ensuring they remain in jobs in a business that will continue to be run well. Also, if you receive the price you want, you could share some of your gain with the key staff who helped you to build the company. By the way, preparing in advance to share your gain through, for example, the creation of a share option scheme would be a sensible move to make especially in terms of tax liability.

The other key factor to consider is what you want to do post-sale. If you want or are happy to stay in the business after it is sold, you will have a greater range of options available to you. In some cases, such as floatation, you will almost certainly be required to stay for a period of time. If the deal does involve you in staying with the business for a while, you will probably be required to accept an earn-out, where part of the sale consideration is held back and paid to you over time against the achievement of agreed targets and milestones. Earn outs can be risky as you now have less control over events, this is a whole topic in its own right – just be careful not to accept too much commitment.

Preparation

In order to be attractive to a potential buyer, and to reap the true value of the business, it is important to ensure that your business is equipped to do everything the buyer wants it to achieve. In effect this is a two stage process; first you must prove your business can deliver what you claim it can, and secondly you must demonstrate that you can satisfy any growth and expansion expectations agreed with the buyer. One key area is your revenue generation capability which will need to ramp up to meet whatever new challenges the new owner will set. If you will now be selling new products or services you need to ensure the marketing and sales operation has the skills and bandwidth to deliver to the challenge. The same principle will apply to all other business departments which might be affected by an increase in volume of work or a change in direction.

Finding a buyer

If your chosen method is floatation, you will need to employ the professionals who will plan and organise the process for you – you have no choice. In this case, the buyer is all those people and institutional investors who believe in your company and want to buy a part of it.

In all other examples mentioned above, finding a buyer is about knowing where to look. For the MBO, it is easy; it is your current staff. In the case of a trade sale or MBI, the buyer is often known to you in the business community where you operate. In fact, they may approach you, rather than you having to look for them. The disadvantage with this apparent convenient and comfortable situation is that you are looking at a very limited list of options and as a result may not be getting the best deal. My advice would be to employ a professional M&A company who know your sector and who will be able to offer you a range of buyers. By creating a competitive situation, you will ensure you get the best price and overall deal.

In Summary:

  • Many of the sell and buy issues will be mirror images of one another, so it may also be worth reviewing the buyers’ perspective.  Read more …
  • A decision to sell should not be a knee jerk reaction to a tactical matter – if it is you will probably get only a fraction of the real value of the business.
  • The essence of any deal is the word “fair”. There cannot be a deal without a willing seller and a willing buyer.
  • The buyer will want to do due diligence – make sure your business is clean and ready for this. That includes your systems and processes, and your infrastructure. Thoroughly prepare those who will act as the interface to the due diligence process ensuring they understand the motivations behind the proposed sale so they deliver a consistent message to the buyer’s due diligence team; a deal can easily be killed at this stage.
  • Know what you want from the deal; money, shares, a job, to leave immediately after the sale, … and ensure you get what you want. The final consideration will be a blend of “price” and terms so if you want to leave on day one you will probably get a lower price and the consideration will be biased towards shares rather than cash. Think carefully about accepting any earn out making sure it is reasonable and that you have the means to deliver what is required.
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