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Kirsty Sandwell
Partner

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Plan your exit strategy

Help decipher what type of exit you should plan for, how to enhance your chances of achieving it and what to do if Plan A fails to materialise.

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Smaller portions

The credit crunch has increased the number of company sales transacted on the basis of deferred payments to the vendor.

Ideally, when a business is sold, the vendor gets 100% of the agreed price as soon as the company changes hands. But with credit in short supply, buyers are increasingly seeking to defer paying part of the sum owed, rather than handing over the full amount upfront. So, if you sell your business for £10 million, you may well receive £5 million now and the rest over a period of years.

Although Kirsty Sandwell, a Partner in Baker Tilly’s M&A and Private Equity team, recommends pushing for full payment upfront, she adds: “If your business is going to grow, deferred payment may present an opportunity to raise the value.”

That’s because valuations are low at the moment, and a company that sells for £10 million today may be worth far more in a few years’ time when the economy has recovered. By agreeing to a deal in which a proportion of the payment is deferred over three or five years, you may be able to secure a sum based on a higher future value rather than the present one, particularly if the final amount is linked to performance. However, there are many ways to structure payments, and you should be comfortable with the deal and familiar with the alternatives before signing on the dotted line.

Credit where it’s due

A common structure involves the vendor extending credit to the buyer via a loan note. If the agreed price is, say, £15 million, the buyer pays, perhaps, £10 million now and borrows the rest from the vendor.

This is then repaid at an agreed time. The risk here is that circumstances can change. “The buyer may not be in a position to repay the debt,” warns Sandwell. “So you should seek bank guarantees, or if they aren’t available, a parent guarantee as a minimum.”

Performance link

Staged payments based on variable factors can be trickier. In this type of deal, the amount paid as part of a deferred consideration will depend on the company hitting agreed targets. “These could relate to financial performance, completing a product development project on time, or retaining key staff,” says Sandwell.

Performance targets mean that if the company does well, the payment is bigger. But be wary of unrealistic targets. “You can build in contractual safeguards,” says Sandwell. “But really you should feel you can trust the buyer before you sign the deal.”

What’s right for you

If you’re planning a complete exit, get as much as possible upfront, and avoid payments based on performance you have no control over. If you’re staying on and feel you can hit the required targets, performance-based deals can mean a bigger payout down the line.