Most entrepreneurs are likely to go through an exit process at some point during the life cycle of their business, so the time will come to put plans in place. But when should this begin?
“A business requires a great deal of effort in order to grow and become a success, so thinking too far ahead might compromise certain goals being reached,” says Simon Smales, a relationship manager at RBC Wealth Management in London. “At the same time, entrepreneurs need to put thought into what will happen both for the company and for them personally when they want to retire or release equity from their business, so having an end game in mind is always a good idea.”
What happens after you make the decision to sell depends on why you are selling. For example, are you planning to retire or start a new venture? Are you seeking a clean exit or do you intend to remain involved with the company while selling part or all of your stake?
You might have several reasons for selling your business, ranging from selling shares to raise money for much-needed investment to simply exiting so you can tackle a different challenge.
Whatever your reason, the process is complex and time-consuming. Much of what happens next will depend on your motivation for selling, whether you want to be involved with the business after the sale, and the timeframe you have in mind. All three of these factors will influence how you go about selling the company, so it’s good to have clarity from the outset.
Planning makes perfect
One of the best ways to ensure a smooth and successful exit is to build your exit plan into your business plan well in advance of making a sale, Smales says. Given all of the moving parts associated with selling a business, it is crucial that everything is in place well in advance of any deal being signed.
To help you to formulate and execute this, identify professionals with relevant legal and financial experience – such as accountants and lawyers – as well as mergers and acquisitions specialists who have experience in your sector. They will help you to prepare the business for a sale by taking a deep look into the operations and balance sheet, contracts and even lease agreements. In addition, advisers will discuss the best options available given your reasons for exiting and, if appropriate introduce, you to credible buyers.
Most business owners prefer to appoint a different set of advisers to help them with the corporate transaction to those who manage their personal affairs.
“That doesn’t mean they can’t be from the same company,” says Katherine Waller, a relationship manager at RBC Wealth Management in London. “Typically, however, the business owner will want a degree of separation between the advisers. This is so the individual feels comfortable and confident they are having conversations about their personal wealth, separate to what the business is doing. Choosing the right advisers is key.”
It is important to make sure your professional advisers understand your values, objectives and timeframe for selling the business. With their help, you should consider any potential tax liabilities that may arise as a result of the sale and how to minimise them.
In order to do this, personal financial planning arrangements will need to align with your plans to sell the business. For example, think about how you hold shares in the company and who stands to realise value from the sale of these shares. Have potential inheritance tax and capital gains tax liabilities been considered? Do you have entrepreneurs’ relief you can utilise? Will the transaction take place in two parts?
“What you don’t want to do is have a liquidity event from selling your business having not spoken to your wealth manager about wealth structuring for you and your family to ensure that everything is in order. It’s all about getting your ducks in a row early,” Waller says.
Ultimately, the more preparation that takes place in advance of a sale, the better the outcome. This period of taking stock of a business can span multiple years and include several deals that are turned down.
“Among our clients who have sold either part or all of their businesses, the process has tended to take much longer than expected and this is something that some entrepreneurs underestimate,” says David Tosh, a relationship manager at RBC Wealth Management in London. “Even when things go smoothly, the negotiation process can be lengthy. This can be a stressful experience and for some people it can be overwhelming, so it is important to speak to the right advisers early on so that you are prepared for every possibility.”
Think seriously about your business’s value
Once advisers are in place and you are ready to start the sale process, it is important to understand how much your business is worth and the price it can realistically command in the market. It is a conversation that can prove difficult for a founder who has poured their heart into the company over the years; nevertheless, it is an important discussion to have.
“The business is always going to have an emotional value versus a financial value. You need to be realistic about the value of your business, and the value you have in it, at the moment and in the future,” Waller says.
From an objective point of view, is the business in good health? The best time to sell a business is when it is doing well, has good management in place and has a successful financial track record. Nevertheless, whether it is performing well or has room for improvement, think about what needs to happen to achieve the best possible price. This could mean renegotiating inefficient contracts or hiring in new senior staff, for example.
Moreover, are all contracts, permits, legal documents and other papers in order? It is also crucial to have an accountant to help you consider any tax implications that might affect the sale. The due diligence process will take time.
Finally, go into the process with your eyes wide open: be prepared for delays and obstacles along the way. For some business owners, the sale of a business can take weeks, and others years.
“There are various ways in which you can exit a business. Depending on who you sell to, it can be a drawn-out and stressful process that takes up a lot of your time. Having the right team around you both pre- and post-exit can only help to alleviate this,” Waller says.
Just remember that planning makes perfect.