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From decision to deal: Making your business exit count

Deciding to sell a business is a major milestone. But once the decision has been made, turning years of hard work into a successful transaction brings a new set of challenges.

For Raj Nayyar, director at accountancy and advisory firm S&W, getting the execution right starts before the business formally goes to market.

Owners need to know the business is ready, understand what prospective buyers will scrutinise and continue running it effectively while negotiations take place. 

And in a market where buyers can be more cautious about risk, problems uncovered during due diligence can have a significant bearing on whether a deal reaches completion.

Raj says: “It’s all about making sure you’ve got your house in order.

“Get the basics right. Make sure you’ve got a full compliance history, your accounts and financial position are in good order, and your taxes have been filed.

“You don’t want any hidden surprises lurking when you’re ready to press the button.”

That preparation extends to the structure of the business itself.

Personal assets can sometimes sit alongside or be used by a company, for example, which can complicate a transaction if the structure has not been considered well before a potential buyer arrives.

Taking advice early can give owners time to address those issues, making sure the business that’s up for sale is structured appropriately.

Is it the right time to sell?

Being personally ready to exit your business does not necessarily mean every other condition will align neatly.

The performance and prospects of the business matter, but owners also need to judge what is happening around them. 

Economic or political uncertainty can make buyers more cautious, while developments in individual sectors can quickly change their appetite for a deal.

But waiting indefinitely for perfect conditions brings risks of its own.

Raj says: “It has to be right for the owner, but it also has to be right for the business.

“There’s probably never an ideal time to sell. 

“You’ve got to take everything in the context of what’s happening internally and externally and balance those factors.”

There can also be opportunities that alter the best-laid plans. An unsolicited buyer offering particularly attractive terms, for instance, could give an owner good reason to reconsider their original timetable.

The key is having enough information to make that decision rather than allowing one factor to dictate it.

And with the Autumn Budget approaching, the temptation for owners can be to focus heavily on potential changes to the tax landscape. 

But tax is just one consideration in a much wider commercial decision.

Be ready for buyer scrutiny

Once a business reaches the market, being prepared takes on greater importance.

Due diligence has always been an integral part of buying and selling companies, but Raj says uncertainty has contributed to greater risk aversion among some buyers. 

That makes issues uncovered during the process potentially more significant.

Something that might previously have been addressed through protections in the sale agreement could now prompt a buyer to reconsider whether they are willing to accept the risk at all.

Raj says: “Buyers are a lot more risk averse and a lot more attention is being paid to issues that come up in due diligence.

“From a tax perspective, we sometimes see things a company has done without taking advice early enough.

“If that comes up in due diligence, there could be potential risk or tax liabilities that become a blocker to the sale.”

Finding those issues before a buyer does gives the owner and their advisers time to understand them and, where possible, put them right.

S&W’s approach to executing an exit similarly includes examining potential risks and liabilities before completion, alongside preparing the business for buyers and managing negotiations through to the deal itself.

Keep running the business

A sale can demand significant time and attention from an owner. Yet the transaction cannot be allowed to distract from the performance that made the business attractive in the first place.

If trading begins to fall away while negotiations continue, a buyer looking at previous results could start to question the assumptions underpinning their offer.

“You’ve got to keep doing the bread and butter of your day job. You don’t want to see a drop-off in performance while a sale is being negotiated,” says Raj.

“Having a management team in place that is incentivised to continue running the business is really important.”

For founder-led companies, a strong management team matters for another reason: If too much of a company’s success depends on its owner, a prospective buyer must consider what happens when that person leaves. 

Building a capable team and gradually removing the owner from day-to-day operations can therefore make the business more resilient and easier to transition.

As Raj puts it: “When someone is buying a business, they’re buying the people as well as the trade.”

Keeping key employees engaged can be equally important. 

Depending on the circumstances, share options or transaction-related bonuses may help align employees with the success of the deal and encourage people who are important to the future of the company to remain with it.

Look beyond the headline price

When offers arrive, the largest number is naturally going to attract attention.

But headline valuation does not tell an owner everything they need to know about the deal they are being offered.

Payment could combine money received on completion with deferred consideration or an earn-out linked to future performance. Some transactions can also allow the seller to take equity in the acquiring company.

Each brings different risks and implications.

Raj says: “You need to make sure you’re getting a deal that works for you.

“There’s a trade-off between what you get on day one and what you might get as deferred consideration.

“With an earn-out, owners take on a level of risk because it’s contingent on the performance of the business going forward. 

“You have to be comfortable with what you’re receiving on day one versus what you might receive later,” Raj advises.

An owner’s personal ambitions matter, too.

Someone seeking a clean break may view an offer differently from a seller who is comfortable remaining involved during the transition to new ownership. 

An earn-out or equity stake in the buyer could suit the latter, particularly if they still want an active role in business after the transaction.

The right buyer, therefore, is not automatically the one making the highest offer.

Owners should consider their longer-term objectives alongside price and deal terms when assessing prospective bidders.

Prepare for the deal before the deal arrives

For an owner hoping to sell in the coming year, Raj’s central message is straightforward: Start early.

Bringing advisers into the process before a transaction is underway can help identify potential tax, financial and commercial issues while there is still time to address them.

It can also leave an owner better prepared if an opportunity appears earlier than expected.

Raj says: “Think about it early, take advice, make sure you’re doing the basics right and have your house in order. 

“You need to make sure you’ve got the right structure that enables a sale to take place and enough time to put the relevant structures in place.

“Some of that needs to be thought about more than 12 months before an exit.”

No owner can remove every uncertainty from a sale. But addressing the issues they can control before negotiations begin can make the difference when a buyer starts asking difficult questions.

Register for S&W’s upcoming webinar, Executing your business exit: Managing the sale process to completion, on 17 November. The session will cover identifying buyers, due diligence, negotiating terms and valuation, deal structures, maintaining momentum and succession planning.

For more information about S&W and how its specialists can support you when executing your business exit, visit www.swgroup.com.

This was posted in Bdaily's Members' News section by Bdaily Publishing .