Exiting your business

When is the right time for us to sell the business? It is a question which every business owner will ask themselves from time to time. The optimal time to sell is theoretically when profits are close to their peak and business is growing, however, overall risk and the potential decreasing appetite for risk as owners advance in years should also be considered.

Selling a controlling interest in a company can be distilled down to a series of negotiations on a range of matters, from the headline price, right through to the specific warranties offered regarding the past activities of the business. As with any negotiations, elements of brinkmanship are involved throughout. Being in ‘last chance saloon’ where an immediate sale is vital, does not give the most solid base to achieve the best deal possible.

The most favourable deals are achieved by owners who balance postponing a sale for X years to grow profits against the risk that their businesses landscape may change unfavourably in that time period. Simply put, always waiting until next year does not guarantee a greater return.

The best way is to plan for an exit as far in advance as possible and to prepare the business to increase value. Aside from growing profits, managing working capital so that swings in the bank balance are minimised can make a very big difference to the amount of cash which is agreed as surplus and therefore which ends up in your pocket.

There are a number of routes open to controlling shareholders considering an exit. The four most popular are:

Trade sale – A sale to another company. These types of transactions made up roughly half of our deals in 2019 but have slowed since covid-19. Historically, good prices were achieved if the purchaser had a strategic need for the company for sale.

Management Buy-Out – Selling to a management team is a process that is controllable and is usually a friendlier transaction. MBOs are commonly funded from a mix of the existing resources of the company, new debt raised in the company, deferred consideration and retained equity.

Employee Ownership Trust – an exit strategy of growing popularity. The proceeds of the sale are taxed at 0% and it ensures a lasting legacy. The sellers can also retain a shareholding. A trust is formed which the employees then participate in.

Private equity investment – ‘PE’ activity in the Eastern region is another growth area. Owners are sometimes sceptical about this option, worrying that ‘suits’ will take control of their business. Modern PE firms are not like this and look for a friendly rapport with the management teams of their investments.

Case study

Dan Croft had steered Vanilla Electronics Limited to strong growth over a number of years. The company reached the stage where investment to fund acquisitions would be required if growth were to be accelerated further.

Being in his late 30’s, Dan was not ready to retire from the business but also did not want to increase his personal risk by introducing more capital to the business. The solution to this was a majority investment from Literacy Capital, a private equity firm, which allowed Dan to sell a controlling stake whilst remaining in control of day to day operations.

This move gave Dan less distractions ensuring that he could better focus on company growth and build up the senior management team. Areas of the business Dan enjoyed and where he could add most value.

Moving forwards, Vanilla now has the funds to make acquisitions to accelerate their growth and, by  retaining a sizeable shareholding, Dan will continue to benefit from the growth achieved post transaction.

For further information on how Ensors can help you please contact Simon Martin.