The structure of the deal and the route you take to sell your business will depend on a number of factors. These include the amount of involvement you wish to have in the future and the health of the business. Both will affect the profile of prospective buyers or the viability of a stock market listing.
Potential buyers are likely to include existing employees, competitors, new market entrants, family members, suppliers, customers and investors.
Here’s an overview of some of the different sale options:
- Full exit/share sale – the transfer of all of the seller’s shares to the buyer, with the entire sum paid to the seller up-front once the deal is closed.
- Earn-out – this means an initial price is agreed for the business, but the seller can receive additional compensation if the business achieves specific goals in the future.
- Partial sale – the business owner chooses to sell a portion of the company or a percentage of their shares.
- Asset sale – only the assets of the company transfer to the new owner. Should any liabilities arise, they are the responsibility of the previous owner.
- Initial Public Offering (IPO) – the sale of a company’s shares to the public via a stock market listing.
- Management buyout (MBO) – a company’s management team purchases the assets and operations of the business.
- Private equity sale – a partial or full sale of the shares to a private equity firm, which hopes to grow the business and sell it for a profit in the future.
Your intentions will determine the type of sale
There are different risks and benefits associated with each path, says Katherine Waller, a relationship manager at RBC Wealth Management in London.
“The choice will come down to how much involvement you would like to have, and what, if any, shareholding you would like to retain,” she says.
Your future aspirations for the company will also have a bearing on the sale route you pursue. If you want to protect the staff and management team, you may not wish to enter into discussions with asset strippers or private equity firms, as they may be more likely to change senior personnel and make redundancies.
Another consideration is whether you are comfortable with the publicity that is typically associated with each exit route. For example, an IPO is likely to attract more press attention and scrutiny than a management buyout.
Likewise, your choice of professional advisers will influence the route you end up taking, the prospective buyers you enter into talks with and the tone of negotiations.
“Make sure you have got the right advisers in place, including a corporate financier, accountants and lawyers. Choosing the right team for your negotiations is paramount,” Waller says.
“Choose the right one. Not because they have the best price, but because they understand you and your objectives as well as the business, its balance sheet and trajectory the best,” she adds.
Poring over potential buyers
The next stage is to come up with a broad list of potential buyers with your corporate broker. Keep an open mind about prospective purchasers and consider how you can utilise your professional network to identify interested parties.
“When you talk to a corporate financier, have an idea of the type of exit you would like and be open-minded. They will then be able to give you other ideas based on their knowledge of what is going on in the market and can help you to draw up a shortlist,” Waller says.
One of the key factors to consider when you are looking at any prospective buyer is whether they are credible. What is their track record? Do they have the finance necessary to undertake a deal?
It is also essential to ensure confidentiality during discussions to avoid sensitive information being leaked to the press or competitors.
With input from your corporate broker, put together a shortlist of serious buyers to receive the information memorandum. This document outlines the history of the business, how it differs from rivals, the ownership structure and financial performance. It should clearly articulate the company’s competitive advantages.
Working out when to tell staff about the sale can be a dilemma during the process. It also highlights the importance of managing information flow.
“It isn’t necessary to inform staff until you have a clear and focused outlook about the sale process, and know what is going to be deliverable. The other side is that anyone who is involved in the process should be deemed an insider, so that knowledge and information is kept private and confidential,” Waller says.
Once you have a shortlist, an experienced broker should help you to create competitive tension among the interested parties.
It is then a case of holding your nerve during final stage negotiations: take a pragmatic approach and keep one eye fixed on the finish line.
Don’t forget to plan for life after exit
In many ways, selling your business marks the transition into a new phase of life. But what this transition entails depends on the type of sale and how it is structured. Therefore you should think through your options in advance, says Simon Smales, a relationship manager at RBC Wealth Management in London.
“If it is a trade sale or a sale to a private equity investor, there will often be an earn-out period where the seller is tied in for a few years to ensure a smooth handover and that the business continues to grow,” he says.
“If it is an outright sale, then the next step is usually a pause for breath. Often this is the first time you will have had so much liquidity, and it is a good idea to put that hard-earned cash somewhere secure and take a holiday before deciding what to do next.”
Indeed, the question of what to do next is what many business owners forget to consider when selling their business, says David Tosh, a relationship manager at RBC Wealth Management in London.
“After more than 15 years of meeting and looking after entrepreneurs, I have found that many business owners are so focused on the deal and the corporate sales process that they inevitably overlook properly thinking about themselves as individuals during this process,” Tosh says. “Too often the tax consequences as individual shareholders are considered too late and likewise individual priorities and goals for life after exit are not fully thought through.”
He adds, “Many business owners don’t have a clear view of what they will do following the sale of their business, while others have done little preparation financially. Seeking advice from a wealth manager and private client tax adviser specialist ahead of the sale provides numerous benefits including wealth structuring following a liquidity event.”
Above all, if a liquidity event is on the horizon, Waller says the best thing a business owner can do is seek advice before it happens. “The ideal time to come for advice is actually before the liquidity event because there are some sensible steps you can take up to 12 months prior to a sale to ensure you make the most of what is, for many, a one-off opportunity,” she says.