Planning Your Exit: Options and Challenges for Business Owners

For many business owners, the value tied up in their company represents the product of years, sometimes decades, of hard work, investment and personal commitment. Converting that value into a successful exit can therefore be one of the most important commercial decisions an owner will make.

Having regularly advised on corporate transactions ranging in value from £nominal to £50 million, across a broad range of sectors and transactions including trade sales, acquisitions, management buy-outs and IT outsourcing, I have seen first-hand that successful exits rarely begin when a buyer makes an approach. They are usually the product of careful planning well before a transaction starts.

The fundamental question for an owner is therefore not simply “Who might buy my business?”, but “What do I want from my exit, and what should I do now to maximise my prospects of achieving it?” This article focuses on how best to realise the value of a business.  

What are the principal exit options?

There is no simple right or wrong answer. The appropriate structure will depend upon the business, its shareholders, management team, financial position and the owners' personal objectives.

1. A trade sale

For many privately owned businesses, a sale to another company is the most familiar exit route.

A buyer may be a competitor, supplier, customer or larger organisation seeking access to new markets, customers, products or capabilities. A strategic purchaser may also be able to justify a valuation beyond that suggested by the company's financial performance alone because of the benefits of combining the businesses. For some acquirers not already having a market presence, a premium may be justified to gain market entry.

Much of my transactional work has involved advising shareholders and companies on trade sales and acquisitions in the SME and mid-market sectors. Most recently, this has included: advising Cordek Holdings Limited on the sale of Cordek Limited, a market-leading UK specialist manufacturer and supplier of innovative solutions for the construction, civil engineering, infrastructure and industrial sectors, and; advising on care home acquisitions for Care Legacy South West Limited, a new entrant into the care sector.

The headline valuation is only part of the equation. Sellers need to understand precisely how and when they will be paid. Deferred consideration, earn-outs, completion accounts, warranties, indemnities and restrictive covenants can all affect both the value and risk of the transaction.

A £10 million offer payable in cash on completion is commercially very different from a £10 million valuation where a significant proportion depends upon the business achieving targets after the owner has surrendered control.

2. Private equity investment

For some shareholders, an exit need not mean selling the whole business immediately.

A private equity investor may acquire a controlling or significant interest while management and existing shareholders retain or reinvest part of their equity. This can allow an owner to realise some value whilst retaining exposure to future growth, potentially giving rise to a second exit later.

The continuing shareholder must, however, understand what life after investment will look like. Governance, management incentives, shareholder protections, leaver provisions and the investor's eventual exit rights can be just as important as the initial valuation.

3. Management buy-out

An established management team may be an attractive successor to an owner who wishes to retire or step back.

I have advised on management buy-outs as part of a broader transactional practice. A recurring issue is funding: management may understand the business better than any external purchaser but may not have the resources personally to finance the acquisition.

Funding may therefore involve external debt or equity and, in some transactions, deferred or vendor-funded consideration. For the outgoing owner, the challenge is often finding the appropriate balance between achieving the desired valuation and accepting continuing financial exposure to a business which he or she no longer controls.

4. Employee ownership

An employee ownership structure can provide an alternative where owners place particular importance on preserving the independence, culture and workforce of the business.

It should not, however, be approached simply as a succession or tax-planning exercise. Consideration needs to be given to funding, governance and the company's ability to support the structure over the longer term.

5. Family succession

For family businesses, passing ownership to the next generation remains a natural option.

Effective succession involves considerably more than transferring shares. Leadership, governance, funding and the respective interests of family members who work inside and outside the business all require thought. Starting that conversation early can make the transition significantly easier.

6. Flotation and capital markets

Businesses of sufficient size and maturity may consider admission to a public market as an alternative route to liquidity and raising capital.

This is, however, materially different from a private company sale and brings additional regulatory, governance, reporting and disclosure requirements. It will therefore only be an appropriate option for a relatively small proportion of owner-managed businesses.

What commonly makes an exit difficult?

Across transactions, certain issues arise repeatedly.

Valuation expectations

Owners understandably attach considerable value to businesses which they have spent years creating. Purchasers may view the same company through a different lens, concentrating upon maintainable earnings, recurring revenue, customer concentration, working capital, cash generation and future growth.

Understanding likely valuation methodology and addressing potential weaknesses before going to market can be invaluable.

Dependence on the owner

Ironically, an indispensable founder can sometimes make a business more difficult to sell.

A purchaser needs confidence that customers, employees and commercial relationships will remain after the founder leaves. Developing a capable management team, documenting processes and gradually transferring key relationships can therefore materially improve sale-readiness.

Due diligence surprises

Poorly documented customer arrangements, change-of-control provisions, intellectual property issues, unresolved employment matters or disputes can emerge during due diligence.

None may prevent a sale, but discovering them after negotiations have started gives the purchaser an opportunity to renegotiate price, seek additional warranties or indemnities, or simply walk away.

Corporate housekeeping

Historic share issues, incomplete statutory records and undocumented shareholder arrangements are rarely the exciting part of building a business. During a sale process, however, they suddenly become important.

Resolving these matters before approaching buyers usually makes for a more efficient transaction and demonstrates that the business is well managed.

In my experience, there can be great value anticipating and planning for a transaction and carrying out a presale corporate audit often allows a Seller to tidy its business and thereby preserve value when earnest negotiations ensue.

Tax planning undertaken too late

The relevant tax treatment can have a substantial impact on the owner's actual proceeds from a transaction.

Owners should therefore obtain specialist tax advice sufficiently early to consider their options properly. The legal structure producing the largest headline price will not necessarily produce the best overall result for the shareholders.

Start with the destination

After advising on transactions across a broad range of sectors and deal structures, my experience is that the best prepared sellers begin by deciding what a successful exit actually means to them.

For one shareholder it may mean achieving the largest possible cash payment on completion. Another may want to protect employees and the company's culture. Others may wish to retain an investment, continue managing the business for a period or make a complete break on completion.

Those objectives can lead to very different transactions.

Good exit planning is ultimately about creating choices: whether to sell, when to sell, whom to sell to and on what terms.

For an owner-manager, planning two or three years before an anticipated exit can provide valuable time to strengthen management, resolve structural issues, improve the quality of earnings and prepare the business for scrutiny. When a purchaser eventually arrives, that preparation can make the difference between simply completing a transaction and achieving the exit the owner intended.

In my experience, both seller and buyer need to achieve something from a transaction, and for the seller, waiting for the perfect moment to sell can itself be the first mistake. Selling for a good price is often better than waiting for the perfect moment. If markets suddenly change, the perfect moment may never come.

About the author

Tim Sadka is a Partner at Healys LLP and has over 25 years' experience advising on corporate and commercial transactions. He has advised on transactions ranging in value up to in excess of £100,000,000, across a broad range of sectors and transaction types, including trade sales, acquisitions, management buy-outs and IT outsourcing. Tim advises business owners, shareholders and companies on the legal and commercial aspects of buying and selling businesses, with a particular focus on achieving practical and commercially effective outcomes.

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