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Planning your business exit

How to get the most value from your business

20 August 2020

3 minute read

Entrepreneurs only get one chance to extract value from their business, so it’s important to make it count.

Taking a close look at your motivation, the details of your business and likely buyers can help you plan a successful exit.

Most entrepreneurs wouldn’t rather do anything else. However, building and sustaining a business is hard work, and there may come a point when you’d like to do something different. Usually, you’ll only get one shot at extracting the value from the business you’ve worked so hard to build. It’s worth planning it with care.

Know yourself

Why are you selling? What do you want to do afterwards? You might want to invest in a new business or retire completely. If you still want to be involved in the business, what will that involvement look like? A guiding hand? A silent shareholder? If you’ve decided this ahead of time, it’s easier to structure the sale according to your needs.

It’s worth thinking about the type of structure you’d like. Something as simple as writing down the five main reasons for selling/not selling, and then considering what’s driving a potential buyer, can help you focus on what the ‘deal breakers’ might be on either side, and help you negotiate more effectively.

Desired value is also worth considering before addressing the structure of the deal, although it shouldn’t blind you to the other merits. You’ve no doubt thought about the value of your business if you’re considering exiting. A useful tool is to establish a personal ‘lifestyle number’ – the amount of capital you need to meet your lifestyle needs. This can focus your negotiations.

Know your business

Credible buyers will look to uncover any holes in your business as part of their due diligence process, so forewarned is forearmed. Seemingly small issues over accounts, record keeping, contracts or business structure can derail a good deal, or see an offer reduced. Take time to consider who owns the business, and what the business owns.

Think through your risks – any buyer will be doing the same. Does the business carry concentration risk in terms of customers, suppliers, products or management? Is there time to do much about it? Will some buyers be less worried than others?

As far as possible, ensure your administration is spick and span. Make sure that clients are invoiced, patents registered correctly, supply chains fully functioning. Does the business control its intellectual property? Are investment properties or other non-trading assets owned by the business?

Any buyer will pay close attention to cash flow, as this is the basis on which many businesses thrive or fail. Are significant contracts coming up for renewal? Is it possible to lock these down so the buyer will feel confident in future revenues during commercial due diligence? What debts are outstanding?

It can be worth bringing in outside help to give an objective view. They’ll be able to look at the business as a potential buyer would look at it. Identifying problems before the due diligence process begins can be money well-spent.

Know your buyer

You can make the sale process a lot easier by understanding the needs and motivations of your potential buyers. There’s no merit in trying to sell to someone who doesn’t buy your type of business. It’s worth considering the different types of buyer you might seek out for your business. Each may have different ambitions for the business and finding the right fit can be important for a harmonious exit.

Private equity/venture capital are still the dominant method for entrepreneurs exiting UK businesses. These are likely to come with conditions, but those conditions can be negotiated. Trade sales will usually involve a capped earn-out. A stock market flotation may be suitable for larger companies. Family offices or ‘angel’ investors may be useful for smaller businesses. There are two sides to any negotiation and the buyer will also have figures, timings and possibly a deal shape in mind too.

Planning for an exit can’t start too soon. By taking a close look at your own motivation, the details of your business and likely buyers, you can set yourself on the right path.

Ready to talk?

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Things to consider

The value of investments can fall as well as rise. You may get back less than you originally invested.

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