Lining up for a smooth exit

The weeks, days and hours before a business changes hands can be a tense time for both vendor and buyer. In principle, the deal has been agreed, but as the due diligence process unfolds and the lawyers draw up the final documents, there’s always a chance that it may falter.

Sometimes the buyer simply gets cold feet, but the greatest danger is that a deal-breaking issue rears its head. For example, the vendor’s accounting or tax reporting could hide significant tax liabilities, or a major customer’s intention to jump ship might be uncovered.

Due diligence may also find that a loss-making subsidiary is draining money and management time, or that there’s a question over profit forecasts. Such scenarios may cause your buyer to renegotiate the sale at a lower price, or simply walk away.

As a vendor, it’s clearly in your interests to minimise the chances of that happening, and the best preventative strategy is to plan early for exit. Even if you’re not planning to sell up in the foreseeable future, measures taken now to make your company buyer-friendly will pay dividends when the time comes to negotiate an exit. Leave it until a month or two before you put the company on the market, and it will be difficult to identify and rectify any issues that could deter a buyer or reduce what you make on the sale.

According to David Fenton, an Audit Partner at Baker Tilly, exit planning and preparation should begin well ahead of any concrete moves to sell the business. “You should be making preparations at least three years ahead,” he says.

Good housekeeping

An important part of the exit planning process is ensuring your company’s accounting procedures and processes match the expectations of buyers. Fenton cites the example of owner-managed companies where the lines between personal and business activities have become blurred.

“You get cases where company assets, such as cars or boats, are used to entertain family and friends. There are huge tax exposures in this,” he says.

So it’s vital to introduce proper policies as early as possible.

Threats are not limited to inappropriate use of assets. Indeed, perhaps the greatest risk is an ongoing and undiscovered problem with VAT, income tax or corporation tax returns that could sting the buyer at a later date. The tax authorities will typically go back six years, and add interest and penalties where they find a problem. “We would recommend having a tax health check,” says Baker Tilly Senior Audit Manager Bill Farren.

A sustainable business

While prospective buyers will be looking at your books with forensic interest, they will be equally focused on the prospects of the business. “It’s important to provide robust forecasts,” says Farren. “That means not only presenting buyers with projections, but also explaining the assumptions underpinning them.” What’s more, such forecasts should be produced on an ongoing basis. Accurate and timely management accounts are also essential.

It’s important to remember that smart buyers will judge the long-term prospects of the company not just on the profit projections and monthly sales and cashflow figures, but also on the management strategy in the months up to exit.

“There can be a temptation to assume that value is all about profits and sales,” says Fenton. “We’ve seen owners cut back on investing for the future ahead of a sale. This can undermine the value of the company.” Too much reliance on a single customer – or even a few big names – can set buyers’ alarm bells ringing. A major client pulling out can shoot holes in your projections, and the prospect of that could scupper a deal. To make the company more saleable, you should generally aim for as broad a customer base as possible. “It’s also good to formalise supply contracts,” advises Fenton.

Risk factors

Assessing commercial dangers internally is good practice, and Farren recommends taking action to reduce such risks and exposure on an ongoing basis. Managing or eliminating them before negotiating a sale will reduce the chance of buyers pulling out at a late stage.

By addressing these issues early on, you will create not only a more saleable company, but also a better-run business, whether you decide to sell or not.