Rob Starr, Head of M&A at Shaw & Co, discusses some key considerations when planning a business exit.
Deciding when the time is right to sell a business can be a difficult and confusing process. It’s a decision that affects many stakeholders associated with the business, as well as those closest to you – your family.
The first step to getting the exit you deserve is to consider the following factors:
The first question to answer when planning a business exit is “What is my motivation for being in business and what do I want to achieve through selling?” For most owner-managers the answer is to make a big change to the pace of their lives while at the same time being able to pay all the bills, look after their family, and provide the sort of lifestyle they want in perpetuity, worry free.
So the first stage of exit planning is setting the ‘magic number’ which is the amount of capital you need to do everything you want in life post exit – from bills to bucket lists. It may be tempting to calculate the magic number on your own, but there is merit in engaging respected and fully accredited independent financial planners who have helped many successful owner-managers with this crucial task. The gap between what you may think is the magic number and what is settled on after professional advice is often very wide – sometimes it is higher, sometimes lower.
While a full sale is the most common transaction for those looking to exit, there are certain situations where you can have your cake and eat it – that is, realise cash by selling a proportion of your company to get that magic number securely in the bank, but continue to work in and own a minority or majority of your business. Often this involves private equity, but some trade deals can be structured in this manner as well. Alternatively, you may be planning a management buyout supported either by debt alone or private equity. Each type of sale demands slightly different strategies and getting the right professional advice can help you navigate this decision.
Moving on from your business can be a challenging process. Owner-managers have often sacrificed years of their life and invested tireless energy to get to the point where a business is saleable. There is an emotional attachment for many to something created through their hard work, determination and, no doubt, with many sacrifices along the way. The right time to consider selling your business is when it seems to be flying along, working largely without you and with exciting prospects on the horizon.
Selling on the up is very much the aim of the game, but at this stage the easy decision is often to hold. The business is paying you well, pressures on your time are reducing so carrying on as you are makes sense. This, however, is the ‘danger zone’ where many owner-managers miss their best opportunity to sell. Why go through the hassle of selling if you don’t need to? Especially as making the positive choice to sell requires that you take your business and yourself into the unknown. This is another aspect of the exit planning process where professional advice can help you decide if you are truly ready to sell.
Risk is a fact of life for every owner-manager and exiting can be the best way to manage it. Starting out on your journey as an entrepreneur requires acceptance of a level of risk that most of the population would pay good money to avoid! Being perpetually unsure of where the next mortgage payment will come from or if your tax bill can be met or if you can afford the holiday that your family are planning is commonplace when building a business.
But when it comes to the point that your business stabilises and cash flow is predictable, owner-managers’ risk appetite can swing rapidly in the opposite direction. This isn’t a surprise when the shares they hold in the business can often represent over 95% of their total wealth. Keeping it, not making it, can become the priority.
Taking a conservative approach to internal decision making, thereby restricting the risk appetite of the business can, ironically, present further risks in itself. This change in attitude can come to stifle the potential of the business and its other stakeholders, especially employees.
So, even if your ambition for growth remains fully intact, a sensible step back and a look at your asset allocation will tell you that your portfolio is probably heavily skewed towards your business. It will likely remain a volatile asset against which a hedging strategy may be impossible, without first liquidating a material proportion of the investment. The only true way to manage over-exposure to a single business is to divest some or all of your interest in it. A partial sale, where you can ‘secure base camp’ before pushing on again or taking on a new challenge, can be a very attractive option.
If your business is driven by non-financial goals, you will need to plan carefully on how to preserve them after the sale. Many businesses are founded with strong values, a mission to make a particular impact in the world or ties to a local community. Selling the business may have more to do with achieving that mission than the financial considerations of the shareholders. Only you can decide!
If you’ve never sold a business before, attempting to sell one without professional advice can leave you at risk of eroding all the value you’ve created. Why risk your life’s work, as well as your future wealth, by learning as you go along? You should never sell your business without seeking the advice of qualified, experienced corporate finance advisors who can add value to the M&A process.
Keep IT Simple Limited (KITS) is a provider of high value IT support and transformation services to public and private sector clients. Find out how we helped with their trade sale.
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