I often get asked, when’s the best time to plan to sell your business or at least start thinking about relinquishing the day-to-day control of your business.
My stock answer is; create a business exit plan sooner, rather than later and have a high-level plan agreed with all key stakeholders. So, whether you’re a new start up, small business owner or owner of an established family business, there is a lot of value in mapping out how you, your fellow shareholders will be exiting the business in the future.
Types of Exit Strategies
One key consideration to take in mapping out an exit strategy from your business, is it doesn’t just have to be through a sale to the highest bidder.
Consider management buyout (MBO) and how you could support the existing business senior team to take control.
Or how you could hand over full control to your children or family members.
I’ve worked with a number of business owners where selling their business was their initial objective. However, as we worked through the process of implementing their exit plan, they realised they could manage and retire out of the day to day, but still retain ownership, by being the chairperson of their business.
Below, are 10 steps you need to follow for a business sale exit strategy. It’s also best to get some professional advisory support, external help, such as from a business exit planning consultant, where they will assist you in making the right decisions and help you follow the appropriate path to relinquish full control of your organisation.
Steps to Exiting or Selling a Business
First, determine what the options are. Is it; Business Sale, MBO, hand over to the children, or retain the business by becoming the chairperson?
However, when planning for your future exit, the best approach is to start on a basis that you are working towards a business sale.
- What’s for sale.
- Is it part or the whole business?
- Determine what the annual value is for existing contracts. Document contract terms, annual renewal dates etc.
- Consider how many of the employees would potentially transfer to new owners.
- What assets, real estate, infrastructure, property, equipment, systems, licences would transfer through a sale or would you wish to keep?
- Be realistic on business sale value, timescales and understand any tax liabilities.
- Business sale price, valuation, is usually based on goodwill and on projected future income.
- The rule of thumb is 3-5 times (multiple*) of net trading profit (EBITDA), after costs, plus any asset value. However, the valuation will be less any liabilities, bank loans, finance, current debt, director loans etc.
*Note; Value/multiple can increase if the business brand is strong, or the business has strong market share and a strategic fit to the buyers existing business.
- Timescales; allow a minimum of 9 months, but it is normal to take around 1 year to conclude a sale.
- Get advice and understand any personal tax liabilities. Check with your accountant, tax adviser.
Then it’s about working towards presenting the business in the best light. I.e., Get everything in order and up to date.
- Ensure all Business Information (BI) is robust and current.
- Annual accounts filed early. Don’t wait till the last minute.
- Complete monthly Profit and Loss, (P&L) management accounts in a timely fashion.
- Maximise cashflow and margins, reduce directors’ drawings/wages if possible
- Balance sheet, reduce liabilities or consolidate finance, sell any underutilised assets which can boost cash reserves.
- Have up to date customer list, CRM system data, ideally showing growth in numbers and revenue.
- Prospects, live opportunities list. Show a positive future growth through current proposals and opportunities.
- Manage yourself out of the day to day.
- Utilise your team, delegate day to day tasks and responsibilities to start relinquishing control.
- Manage out of any operational/delivery roles. Which may mean increasing headcount or increasing staff hours in the short term.
Finding a potential buyer.
Attracting the right person to buy your business is critical if you want to ensure that the business continues once you have relinquished your place within it.
- Go to market.
- Determine whether to sell through a broker, or sell through own efforts.
- Create a one pager “teaser” and a business sales memorandum.
- Shortlist investors, business-people to approach.
- Be clear and consistent on why you’re selling the business on an on-going basis.
- Have an NDA signed with any interested party, before sharing any business details.
- Be prepared for low offers and hard negotiation on a sale.
- Receive offer/s. (Letter of Intent (LOI), agree Head of Terms HoT)). Ideally vet buyers’ intentions for the business, ensuring they match your values and legacy.
- Enter due diligence. This can take 3 months or more, where the buyer’s team will investigate and drill into all aspects of your business.
- Potentially renegotiate terms. A savvy buyer will look for reasons to discount the sale.
- Be prepared for a tie in period. It is normal for the buyer to tie in existing owners, to mitigate risks for at least 12-24mths. They will also likely defer or phase the agreed payment for the business too, based on ongoing business performance projections.
- Decide and conclude sale, involve professional legal support, accountants, solicitors etc. and don’t underestimate the costs and disruption involved to sell your business.