Structuring for a Sale in Uncertain Times

A sense of hesitancy currently pervades the UK M&A market, in large part caused by Brexit creating an uncertainty surrounding the economy, with no-one knowing what the outcome will be.

However, for the SME market in particular, which is not so heavily reliant on global supply chains, there are still good deals to be found for buyers, and open exit routes for sellers. According to Keith Spedding, corporate partner at law firm, Shakespeare Martineau, what’s important is ensuring that the right method of sale is chosen, both for the individual and the business.

Businesses will always want to sell, no matter the economic climate. The drivers can be varied, for instance, a desire to focus on other business interests, or in the case of many business owners, simply wanting to exit the business and retire.

Where possible, people in general – especially the owners of SME businesses – do not want to work for as long as they used to and many have already worked longer than planned. The 2008 financial crash put a spanner in the works for a large number of business owners who were planning to sell up and a decade later, these people are still looking to take the next step in their lives, which can only happen once their business is sold.

The financial crisis took its toll on SMEs and many organisations chose to streamline second-tier management in order to reduce costs, leaving the owners to directly run the business. Although helping to keep the business afloat at the time, this decision has left some businesses with limited options for their exit strategies.

If an owner wants to make a total exit, there are four main options for SMEs. The first is a private equity sale, involving the business being sold to an external investor. These investors look to acquire businesses with growth potential, before making changes to increase profitability and selling it on again.

Another option is trade sale. This is where a competitor buys the company to grow their own using the existing connections and customers of the bought business.

Employee Ownership (EO) models, the most famous of which being the John Lewis Partnership, are increasingly popular and involve every employee or limited groups of employees of the company becoming a shareholder. Staff can influence the direction of the company and an image of high equality and solid ethics is built around the business. Robust second tier management is needed to successfully undertake this form of sale and it is often chosen by business owners who want to ensure the company’s continued independent existence, whilst rewarding long-serving employees.

Management buyouts (MBO) and vendor-assisted management buyouts (VAMBO) are two of the final most common business sale options. These processes involve the management team approaching the owner for a sale, either with private equity or bank backing.  A VAMBO is where the seller provides the backing by deferring payment for the business. Again, experienced second tier management is needed for this sale option.

For all types of business sale, looking at the structure of a business and assessing whether there is some form of credible second tier management that could be involved is vital. If there is, then an MBO, VAMBO or EO sale could be carried out. If not, then a business owner looking for an exit may have to pursue different avenues.

These other options mainly include private equity sales or trade sales. However, if the sale does not have to be immediate, there is the possibility of putting second tier management structures in place, although this is not a quick process and may require significant resource. Evaluating the current workforce and identifying if there is anyone who has the potential skillset needed to become management must be considered. This way, they can be trained, and the company can be sold through an MBO, VAMBO or an EO model put in place further down the line.  Equally if there is some level of credible management then this could be strengthened by external management for the deal.

Assessing long-term goals and results is important, for example, if selling by private equity, then accepting that the business will more than likely be sold in a few years’ time is necessary. With trade sales, sellers must be happy with the idea that the business will be kept going, perhaps in a different way, by competitors who want to derive a greater income from the company, or indeed might close the company down to reduce competition.

For MBOs, VAMBOs and EO, the capability and willingness of successors needs to be thoroughly checked, or else the business may not be able to continue.

If a sale option is chosen which does not fit the goals and structure of the business, there is the risk of disgruntled staff or second tier managers. For example, in an MBO scenario, managers may not have the strength or credibility to be involved in the buyout, so may feel they were pushed in the wrong direction and now must recover the business themselves. This could lead to ill-feeling within the business and ultimately, an exodus of long-term staff.

Trade sales themselves also come with risks. Choosing this route requires taking on a degree of vulnerability: competitors must be able to see the information they need in order to make an acquisition and this could be used to their advantage. Customers can also be put off the business, as they trust the original owner, not necessarily the new ones. This would become detrimental to the future of the business.

No matter the instability of the economy, people will always want or need to sell. Exiting the business is not a simple matter of selling to the highest bidder, and careful consideration of the options available needs to be taken. Choosing what is best for that individual business is essential to future success.

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