Choosing your preferred business exit route early on clarifies the road ahead. Here we discuss the pros and cons of the most common types of company acquisition.
Ideally, a business run from the outset with some sort of exit in mind is good practice – even if you never intend to sell.
If your organisation, data and records are sufficiently accurate and up-to-date to meet a suitor’s due diligence requirements and tick off a real or conceptual ‘Selling Your Business’ checklist, it will demonstrate to third parties that you run a tight ship.
If you do wish to sell in due course, establishing a flexible strategy is simply good management. It sets an end goal and clear destination for the journey ahead.
Tip: Read When should I sell my business
What should I sell?
A lot of people assume business ownership is binary: you either own your enterprise or you sell it to someone else.
Of course, the latter is always an option. Whether you want to retire, feel burned out, or simply want to turn all those years of hard work into cash, a full sale offers a straightforward clean break, albeit with a transition period attached to minimise disruption and ensure a smooth handover.
However, it is always worth considering a partial sale as an option, especially if you are not ready for retirement; a potential buyer wants to retain your expertise; or you want to mastermind the business’ next growth stage.
While most acquirers and investors will want a controlling equity stake, if you are struggling to scale your business to achieve your financial goal, this is a way to de-risk your financial exposure while you wait for another few years for the option to sell the enlarged business outright.
Who do I sell to?
The most common exit route is selling your business to a third party (a good advisor will ensure a competitive process via multiple suitors). Around three in four successful business exits are to another company or individual.
This is usually the route to maximising your immediate payoff.
The usual expectation is that you won’t walk away straight away upon completion of the acquisition. Your full reward will be phased, with part of the value delivered after a successful transition. This makes it vital for both parties to emerge from negotiations feeling that the process has been fair and equitable, otherwise working together is going to be unpleasant, pressured and counter-productive.
Private equity (PE) investment is a flexible option, though unlike early-stage investors (venture capitalists) most PE firms will want to have and retain a majority stake. The upside is the opportunity to realise the value of your own investment, maintain your role and interest in the enterprise, while recapitalisation of the business allows it to expand rapidly.
Again, it is vital to remain on the same page, with a clear and shared vision of the new direction being taken – and how your gradual managed exit is to be handled (timeframe, responsibilities, financial terms, etc).
While some investors are hands-off and will leave decisions to you and your leadership team, others will want to implement specified growth plans. They may want you to acquire competitors, enter new markets or expand more rapidly than you wish.
Consequently, while an equity investor can inject new skills and ambitions alongside new money, be wary of this approach if you do not feel a gut affinity with your new partners. Not all private equity firms think or behave the same way: some will be sharks, others will be angels. If you’re not sure which you’re dealing with, pause negotiations and seek a professional opinion.
This will not work if you don’t think your managers can run your business without you (or fear that they will do a better job!). Get past this hurdle, though, and it may be your best option, ensuring continuity and a smooth transition.
For businesses worth £1m-plus, management buyouts will typically be backed by private equity or bank financing. Your managers acquire your business assets and become the new owners, possibly investing their own funds as well – usually equivalent to a year’s salary for everyone in the MBO team.
MBO transactions are more common in low-growth mature industries where trade acquirers can be harder to find. Naturally, if this is the only option on the table, you may find it hard to achieve a premium price. Always get legal advice before negotiating a management buyout to ensure you get a fair deal.
Asset sales are a way to sell some or all your business assets (such as stock, equipment, customer lists or intellectual property) to someone else while you remain the company’s legal owner.
Although less common than share sales, asset sales are worth considering if you find yourself struggling financially or stuck in a declining sector. In each case, this can be a route to boosted cashflow and a chance to regenerate the business. Asset sales tend to complete more rapidly as the due diligence process is quicker and the buyer can remove assets which become a sticking point (eg unpaid invoices which are unlikely to materialise). Unlike a share sale, minority shareholders who don’t want to sell can be forced to accept the terms of an asset sale.
The downsides are that contract rights are limited, so agreements with employees and customers may need renegotiating. The overall tax cost can be higher than a share sale, and the seller can end up with significant liabilities (such as building leases).
Selling a business to staff is often deployed to save jobs where a company is at risk of failing. That said, there are plenty of examples of highly lucrative firms becoming employee-owned. Examples include vegbox supplier Riverford; jam maker Wilkin & Sons; and civil engineering consultancy Arup.
Employee buyouts are typically arranged through an employee ownership trust (EOT), though in a small workforce (fewer than 10 people) it may make more sense to make each employee a direct shareholder.
Philanthropic owners may wish to sell a minority stake to their workforce in the short term, then sell the rest later. This needs careful planning. It is much harder to attract an investor or trade buyer to a company with a large number of minority shareholders. Equally, empowered employees may not want to play ball or take on full ownership.
Employee buyouts can improve productivity and motivation, minimising disruption by retaining the existing management structure. However, it is rarely the most lucrative exit option for outgoing shareholders.
Which one is for you?
By talking to an independent M&A specialist, you will gain an impartial insight into the pros and cons of each exit route. Keep an open mind. Explore all options. See which ones align with your values, personal goals and ambitions for the business.
Don’t get hung up on process or a ‘How to Sell Your Business’ checklist. These things can be very helpful, but every sale is different and like you, every client has their own pressure points, priorities and (dare we say) peculiarities.
The important thing is to do all your thinking and much of your planning well before you make a commitment to sell.
Then stay flexible. Your market, business and personal priorities will change. But if you’ve done your research and thinking in advance, it means that when you choose to move on – or when circumstances make this expedient – you’ll be ready to make the most of the opportunity.