Getting it right

A successful exit strategy for founders

Deciding when to sell a business is never easy. Business sales are costly, complex and expensive. Yet securing that first exit is an opportunity most entrepreneurs dream of - enabling them to cash in on years of hard work and reward the employees and investors that helped to build the company into a sellable business.

Picking your time

M&A is impacted by market conditions, and the conditions relevant to each industry will vary. If you can time your sale to a period in which your business is seeing economic growth, then it is likely you can maximise the sale price. You may also want to consider how your own financial year interacts with the transaction timetable and time it accordingly. 

Transactions may commence with an earlier set of financial reports, but may extend into a new reporting period, during which you will have had your eye on the transaction, and not on the business! If your business is seasonal, consider timing your transaction as you come out of your busy season. This can be particularly important if the sale price is determined as a multiple of your company’s earnings.

Selecting your team

You should select an internal champion (likely the CFO or CEO) who is tasked with running the transaction. Your transaction may take over the majority of their working day, which will be distracting for them, so ensure they are afforded the bandwidth to deal with that. Have a strong communicative team handle the day-to-day operations of the business, allowing the internal champion to focus on the sale.

Have a strong communicative team handle the day-to-day operations of the business, allowing the internal champion to focus on the sale.

A well-organised board is also crucial as this assures future buyers the company has good corporate governance. Even if entrepreneurs have “bootstrapped” the company to the sale, having a good sounding board during the process is invaluable, particularly if there are board members who have successfully navigated an exit as entrepreneurs.​

It is worth considering how to incentivise your board and other loyal or critical employees. Granting them equity is a good way to focus their minds on an exit and to reward their loyalty and hard work.

Tidy up your corporate governance

Corporate governance issues are likely to be uncovered during a due diligence process and can potentially derail a sale process. Before any sale process begins, pre-sale due diligence on the company should be done - addressing remediable issues and documenting as many processes as possible.

One key corporate governance item is to know your shareholders. As well as having up-to-date contact details for all shareholders, you should also make sure that you have a current cap table which aligns with Companies House and your statutory registers, as any inconsistencies will raise red flags for potential buyers.

Choosing a buyer

There are essentially two types of buyers: financial and strategic.​

Financial buyers are likely to be private equity funds who are focused on achieving quick growth and a certain rate of return. A financial buyer will often ask selling shareholders who are key to the success of the business to “roll” some of their proportion of the purchase price into equity or to defer consideration payments so that they are based on the Company’s future financial performance. While this may lead to a lower tax burden and greater returns when the company is sold, you will not receive the full purchase price upfront and you may have to wait until the financial buyer exits to receive a full exit. You are also likely to be required to remain with the business for a fixed minimum period post-sale. If you plan to immediately retire or start a new venture, this is less likely to be the right choice.​

A strategic or trade buyer will have the operational expertise to run or integrate the company after completion of the deal. A strategic buyer is likely to pay more than a financial buyer and will be drawn to companies with an established market position (which is why it is always worth keeping competitors close!). The purchase will either be structured as a "lights on" deal, where management sellers will stay onboard for a fixed minimum period post-sale, or a "lights off" deal where the business is fully integrated into the buyer’s group after completion.

Selling entrepreneurs should take specialist advice on their exit strategy at an early stage.

As well as considering what is best for the future direction of your business, the type of buyer that is best suited to your transaction will depend on your own tax and financial plans, how quickly you plan to move on from the business and how quickly you would like to realise the capital from the business. Selling entrepreneurs should take specialist advice on their exit strategy at an early stage.