Exit strategy

Sooner or later, most founders decide that it’s time to sell up and cash in. Yes, a large number of business are passed on within families, but for the majority of owner managers an exit through sale or even flotation provides an opportunity to enjoy the monetised fruits of many years of hard work.

The question is, when should you start planning an exit? If your business is only a year or two old that may seem premature. Although there will always be fledgling companies that attract the attention of buyers from the earliest stages in their development, most entrepreneurs are in for the long haul. They have customers to win, new markets to conquer and frequently have a personal interest in guiding the company on to bigger and better things. The idea of an exit seems far distant.

But as Kirsty Sandwell, a partner in Baker Tilly’s M&A and Private Equity practice points out, even if your departure as owner is many years down the line, to maximise the value of the business you have to ensure that it ticks all the boxes that will make it attractive to buyers. The truth is that grooming a business for sale is not something that can be done at the last minute. “Selling a business may take you up to six months and whilst you can do some fine-tuning, you won’t be able to achieve a lot in that time,” says Kirsty Sandwell.

The grooming process

Thinking ahead is vital. Sandwell advises that when business owners look to the future, their planning should encompass the exit. “You have to think about where you want the business to go and when you might want to exit,” she says. “And if you want to exit in five years, you have to ensure that the business is ready when you get to that point.”

The key is to understand where you are now, and what action needs to be taken to get you to where you want or need to be – and there’s a lot to think about. For instance, it may be necessary to re-organise your management team and decide on a succession strategy. If the business relies too much on you, then it will be difficult to sell if your plan is to cash in and leave. Hard as it may seem, it’s important that you are not perceived as irreplaceable by buyers.

Then there is the housekeeping to consider. “Very often what you find is that entrepreneurs invest time and money in what they know about and don’t pay enough attention to those areas of the business that are vital but outside their area of interests, notes Sandwell. “This can mean that energy is expended on, for example, marketing and developing products, with not enough attention being paid to the back office function or the IT system. An investment in these aspects of the business will contribute to the creation of a better and more profitable company while ultimately providing buyers with the assurance that the financial information they’ve been provided with is sound.

Providing assurance is a hugely important part of the grooming process. Tax affairs should be in order, as should contracts with staff, suppliers and customers.

Best way out

If an exit is a distant prospect, you probably don’t have to spend too much time considering whether to opt for a trade sale, MBO, acquisition by a private equity or a flotation. Sandwell emphasises: “Good housekeeping measures are appropriate to all these options.” At some stage you will have to focus on a particular exit route.

“To some extent the path you choose will be dictated by the nature of the business and your own ambitions,” says Sandwell. “For instance, if you want to get all your cash out, a trade sale is probably the best option.“ That’s not to say it’s impossible to cash out via a private equity deal. However, you will only be able to do this if you have a very good management team in place and if it’s clear that you are not the driver of the business.” Otherwise you will be expected to retain shares and continue in the driving seat.

A flotation is not generally considered an exit route, not least because City investors will be suspicious of any attempt to come to the market that appears to be motivated by a desire on the part of an owner to cash in and move on. “A float should be considered as an evolution rather than the end of the road,” explains Sandwell.

Your advisors will help you to choose the route that is right for you and your business, but it is the planning and preparation that you have carried out well ahead of the event that will help you gain the best deal on offer.