7 ways to sell your business you need to consider
What options do you have?
If you’re looking for the exit door, then there’s a lot to consider, and in this Growing Business special we kick off with an overview of the different types of sales you can make. There are many ways to sell a business and choosing the right one for you is crucial.
This is the most likely form of sale, as the buyer who is likely to value your business is going to be a competitor. You know your market and the main players, so if one of them is looking to make an acquisition, then they could be a good bet. By acquiring you they are both increasing their market share and eliminating competition and, as a result, you become more valuable. However, the difficulty is that in order to sell to them, you’re revealing yourself to the competition. And even with a non-disclosure contract in place, it’s not easy to stop word getting out and potentially causing problems with clients and staff. Alysoun Stewart, head of strategic services at Grant Thornton, says: “When you come to market you’re taking a risk. There are quite a lot of businesses that can be damaged by this. Uncertainty among staff and clients is the thing that businesses like least.” Earn-outs are a common part of trade sales and other exits, so if you’re looking to get out quickly then you’re in for a tougher negotiation. You might not like the prospect of working for someone that you were once in competition with, but it’s assumed that you’re key to the company working. Once you do get out, then you are likely to be subject to some form of non-compete clause. They haven’t just bought you to then see you go off and start again. Legal assistance is required here to ensure that the clause is as narrow as possible.
Selling off the assets
This can be done as a trade sale, and if you are determined not to have an earn-out period then it might be the best route. However, it’s not always the most advisable thing to do, as inevitably you get a lower pay-out, but for the buyer there are fewer problems. Tony Timberlake of Secantor says: “The decision to buy the equity of the company nearly always suits the seller more than the buyer as they inherit all the history of the business as if it was theirs to begin with. However, the sale of the assets is nearly always in the best interests of the buyer.”
On the other hand, it depends on what you have to sell. If you have a clutch of long-term contracts and a freehold, then you could make good money, but ultimately there will be parts you can’t sell.
MBOs aren’t easy to do and typically take many years to get in place. The main problem with an MBO is that your management has to be of a certain calibre to attract funding to buy you out. Also, it helps if they have sufficient levels of cash to put into the pot themselves in order to convince investors that they are committed to the cause. There are ways to get over the equity problem and Timberlake suggests one such approach. “If the owner has a freehold,” he says, “then they can take it out of the sale and then lease back the property to the management team, lowering the sale price and generating an income for themselves in the long-term.” Typically, MBOs will produce a lower price tag than a trade sale, as the competitive element between buyers is removed. They are often quite an emotional experience for those involved, as you slowly see the business you’ve created move over to your team. However, there can be a satisfying element in knowing that your ‘baby’ is in safe hands.
There are groups of talented people out there who want to work together and are actively seeking hot prospects. They are likely to be committing their own cash and have backers whom they are close to. Essentially, it is a take-over and can provide a good exit route. Specialised advice is required here to maximise value and ensure you get the deal you want, as MBIs can be complex and involve interactions between a large number of parties.
MBIs can emerge through several routes, but usually begin with an introduction from a corporate finance group or business advisory firm. You should, as with many exits, expect there to be an earn-out period where you hand over the reigns to the new team. The key on such a deal is to ensure that your payment is linked to earnings and not profit, as restructuring can cost a lot of money.
BIMBO (Buy-in management buy-out)
This is when you bring in a chief executive to your business who will then sell part of his stake to the existing management. In effect, you are finding a successor who is prepared to shore up his ascendancy by breaking off a part of the business for the key players. Usually this is something that only happens in the world of big business – for smaller firms, it is not a common route. However, it can happen if you meet an individual buyer with a lot of cash that really wants to run your business and sees the value in your existing team.
Family successions can be heaven or hell, and you should take nothing for granted. Ensure your successor really wants it and can do it, as you are handing over your pension to them. Gradual exits are common, and are sometimes eased by bringing in some outside parties. If your offspring are really serious about buying, then are they prepared to commit their own money to the business? There are many finance options available, and if your business is credit worthy, then your son or daughter should be able to get leveraged. It’ll be growing up time when you leave, but it helps if they are pretty mature before that.
You shouldn’t really regard a float on the stock market as an exit, as investors won’t back you if you sound like you want to bail. Flotations are, however, great ways to realise value from your equity, and to remain with the business (key players are typically locked into a company when it goes public). The costs of floating on AIM and PLUS can be prohibitive to some companies, and it is a tough six months as you prepare for market. You’ll need to bring in a team of advisers (nominated advisers, brokers, lawyers, accountants), and usually beef up your board with some non-executives, as well as improve your compliance and procedures. It isn’t easy – in fact, it’s very hard and expensive. However, the prospect of raising a very large amount of money, while retaining control of your business is what drives you on.
Whatever exit you chose you should prepare for a tough period both emotionally and in terms of work, especially if you have run your business for a long time. You also need to ask yourself whether money is the sole motivator that will drive your decision, or if there are other factors. Leisure entrepreneur David Lloyd has said that it was hard for him to see the company that bore his name go to someone else. Whatever route you take, long-term planning is the key. Some exits can be done in a few months, others take years to plan and execute. So choose wisely.