Below Jonnie Whittle, financial planner at wealth management specialist Clarion, takes a closer look at the process of selling your business.
CEOs are different from other people. Their talent lies in imagining a new solution or fresh approach that gives the world something it may not have realised it needed.
The business becomes the owner’s purpose, identity, primary community for relationships and the most meaningful way to spend their time. A sale may result in a financial windfall but it can leave the CEO facing big questions and hard decisions, while also feeling a loss of purpose.
The most successful transitions require the owners to orchestrate finely tuned exits.
In a lifestyle that is already supercharged with responsibilities and deadlines, taking the time to initiate the planning process early is often neglected, a situation that can greatly affect the choices available and, ultimately, the value of a life’s work. Without detailed planning business owners are often forced to exit on the other people’s terms, and a transaction that should de-risk the vendor’s position becomes fraught with dangers itself.
Fortunately, business owners do not have to carry out this process on their own. One of the keys to achieving a smooth transition is for business owners to engage early with a financial planner, who will examine their business and family circumstances in great detail and establish their life goals, commitments and aspirations.
They ask questions, agree a strategy and ensure the plan is followed, working closely with the other professionals making sure everything runs as smoothly as possible in this potentially stressful period. Once the sale is complete your financial planner usually becomes a lifelong partner and sounding board, allowing you to make the most of your hard work.
Achieving a successful exit involves six key stages.
- Identify personal goals
People sell their businesses for many different reasons. A potential vendor should start by identifying these and begin to plan accordingly.
What will life look like after the sale? Does it have to be a “clean break” on day one or will an earn-out period be acceptable? Will the vendor start another business in future, “go plural” with a handful of choice non-exec positions or head straight for the golf course?
Business owners have heavier responsibilities than most people but also more choices. A sale is not usually forced upon them, so they should only exit if and when it works for them and their families.
- Optimise business and personal affairs
Occasionally one hears of a buyer coming out of the blue with an offer that nobody in their right mind would turn down, and contracts of sale are wrapped up in a matter of weeks. More often than not, however, the sale process is a lengthy one: a prospective seller should allow at least two years from the point at which their business is first actively marketed, and probably considerably longer.
It is during this early, planning stage that they should make sure they are in the best possible tax position. This could, for example, include transferring shares to their spouse in order to maximise Entrepreneurs’ Relief from Capital Gains Tax.
Most CEOs affairs are complex and eligibility for some tax allowances is not immediate so the longer their advisers can be given to optimise the vendor’s position the better.
On the business front, all outstanding contentious issues, contract disputes and litigation should be dealt with. “Gentlemen’s agreements” should be replaced with watertight contractual obligations.
- Identify the best assets
Every business has different facets that will be uniquely attractive to buyers. It may have a strong brand, experienced management team, solid repeat customer base, forward contracts and/or favourable leases. All businesses also own intellectual property – this should be identified and, wherever possible, protected.
Intangible assets (“goodwill”) can considerably increase the value of a business and should be documented thoroughly. Specialist lawyers and accountants can help at this stage.
- Make the right impression
Image may not be everything, but it counts for a lot. A business that is being offered for sale needs to look its best, both financially and non-financially.
The vendor should take a hard look at the company’s external image, looking objectively at its website, head office, facilities, marketing and publicity materials. Does the outward appearance match the company’s inner strengths?
Unless the company has amazing yet under-exploited intellectual property, its financial track record will be pivotal to the price it achieves. The accounts provided to potential buyers should not usually be identical to those supplied to the Inland Revenue – a corporate finance specialist will be able to prepare adjusted “valuation” accounts that take out one-off items and cut through the “noise” to provide a more accurate picture of the potential value of a business to a purchaser.
- Cast the net
Vendors should consider who would have the most to gain from acquiring their business, and why. They should be prepared to widen their list of candidates, and to engage a corporate finance specialist with a strong track record in their sector who can market their company to buyers they might never have thought of.
The best bid might not come from the most obvious trade sale. The business might have a geographical footprint that offers access to attractive new markets for a foreign buyer. Perhaps the company’s skills, products or services would complement a potential buyer’s current offering in a different field. Or the business may have characteristics that would make a private equity house want to back a management buy-out or buy-in. There is no point limiting the market of potential buyers.
- The sale
During the period leading up to an initial offer being agreed the vendor’s team control the information that is available to a potential buyer. Once heads of terms have been signed, however, the boot is on the other foot and the purchaser’s due diligence team will start picking their way through the company’s deepest secrets.
This is the most dangerous period for the vendor, when the price is “chipped” away and guarantees are demanded. It pays, therefore, to keep the interval between signing heads of terms and completing the deal as brief as possible.
There are two main ways to achieve this. The first is to ensure that the company’s house is in order and there is nothing untoward for the buyer’s due diligence team to unearth.
The other is to have another buyer or two in reserve, to keep the pressure on. It is, anyway, sensible to have an “insurance” offer in case the most favoured buyer pulls out for reasons beyond the seller’s control.
Life after the sale
Without a clear financial and lifelong cashflow plan the period after a sale can be difficult and uncertain. Many business owners wait until this point before consulting a financial planner and embarking on the process of working out what they want to do with the rest of their lives and whether they can afford it.
Financial planners can help at this stage – especially if they provide access to a specialist cash management service which will provide secure breathing space before any decisions are made regarding investments.
Contrast this scenario, however, with that of a business vendor who has been working toward this moment for years with the support of an expert financial planner. In this situation the vendor already has a clear picture of the future and the confidence that comes from having a detailed plan to achieve a whole new set of goals. Completing the deal marks, in this case, not an uncertain ending but a purposeful, exciting beginning.