Ryan Smith of EMC Corporate Finance suggests a few options you may wish to consider when it is time to sell the business

There comes a time in the life of every business owner when they start to think about their exit and the options that are available to them. This can be a daunting and stressful time for someone who has never been through the process. But like any other big decision, if you plan ahead and seek the right professional advice, you will maximise your chances of a successful outcome.

When considering selling a business, there are several options available and which one you choose will depend on your personal objectives, the nature of your business and the overall market conditions.

We will briefly explore some of the common options that every owner should consider when planning for an exit:

Management Buyout (“MBO”)

In an MBO, the management team of the business purchases the company from the existing ownership, often with a combination of personal money and third-party debt/equity to finance the buyout.

MBOs provide continuity of management and may allow for an owner to exit gradually over a period of time whilst retaining some involvement and control. This option can be attractive if there is a strong capable management team in place that is familiar with the business and has the ambition to take it forward.

However, this option is not without potential drawbacks, as raising external finance can be challenging for a management team and that, together with having a limited buyer pool, can result in a seller not maximising the financial value from a sale.

Sale to a trade or strategic buyer

This involves selling the business to a competitor in the same industry or a company operating in a related industry. Often referred to as ‘strategic buyers,’ this option can often drive higher valuations for a seller as buyers will be seeking to get access to things such as higher market share, new market development, expansion of product/service offerings or intellectual property to name a few.

Whilst sales to strategic buyers can result in higher valuations for shareholders, any seller considering this option should carefully evaluate the strategic fit and cultural alignment with potential buyers to ensure a successful integration after the deal closes. It is not unusual for a seller’s value to be tied to an element of deferred consideration or earn-out over one to three years. So make sure you are confident of the right fit and have well-negotiated and structured legal documents.

Sale to a private equity or financial buyer

Private equity is likely to be a term that you have come across before. Essentially, it is a professional investor or group of investors seeking to generate returns from investing in businesses or assets. There is a broad spectrum of private equity investors in the UK that all have different investment criteria, sector expertise and styles of operating.

Typically, a business will need to be generating profits of £500k+ per year and have both a track record of profitable success and potential for growth before a sale to private equity is a viable option.

If the business does have the right attributes then selling to private equity can provide an attractive exit route that secures the future of the business with an experienced new partner onboard. Private equity investment often comes with growth targets, stricter financial oversight and reporting, and more pressure on business performance. Therefore, a seller must be ready to accept that, and confident it is right for the business and its employees.

Employee ownership trust (‘EOT’)

Another option to consider is an EOT, which is a legal structure that allows employees to collectively buy the business from the selling owner. These have grown in popularity over recent years with several high-profile large corporate taking this route, such as high street retailer Richer Sounds.

As part of an EOT, the business is transferred into a trust on behalf of the employees. The trust becomes the legal owner of the business, and the employees become beneficiaries of the trust. This option can be particularly appealing if an owner has a strong desire to reward and empower employees by offering a stake in its ownership.

There are several potential benefits of an EOT including: employee engagement and retention; business continuity as well as significant potential capital gains tax savings for the seller. However, careful consideration should be given to the financing of the transaction and whether the employees have both the skills and appetite to take an ownership stake in the business with all the risks and stress that go along with it.

Summary

These are the most common exit routes – not an exhaustive list. Selling a business is a significant decision so it is important to take the time to evaluate all the options and seek the right professional advice and guidance. Regardless of the option you choose, making sure the business is prepared for the sale process is crucial.

By planning ahead and taking steps to make sure financial records, contracts and agreements are in good order, a seller can maximise the value from a sale process and ensure a successful transition to new ownership.

A good adviser will support you in understanding the relative potential benefits of each of these options and align your succession planning activities accordingly. Remember it is never too early to start having these conversations and getting your house in order, – you never know who might knock on the door.

EMC Corporate Finance

T: +44(0)1273945984
E: ryan.smith@emcltd.co.uk

www.emcltd.co.uk