There are a number of alternatives available to you when it comes to selling your business. Most business owners think that a trade sale is the only (or most attractive) route to exit. In this blog we explore a number of options that should be considered…
1. Trade Sale
Let’s start with the typically assumed exit route: the trade sale. If you, as a business owner, aren’t involved in the day to day running of the business, or if you have a great management team doing most of the leg work for you, you may well find that are in a better position to sell to a third party. Obviously having a growing business will help, and a great product or service will be fundamental to gain the right interest from the right buyers. But if you tick all of these boxes then you may well be able to sell for the price you want.
Given that the buyer here is likely to be a “stranger” or even perhaps a competitor you’ll need to make sure that you have them sign a confidentiality undertaking before you start sharing information with them over and above the usual first stage documents.
The trickiest negotiations with a trade sale can be around the payment terms. If you are getting all of the consideration at completion (which is rare) then great. Otherwise you’ll need to carefully negotiate, with the help of your professional advisers, the terms of any deferred consideration or an earn-out. Remember once you have sold your business you are no longer “the boss”: so be prepared not to receive what you might expect particularly if your buyer is unscrupulous…
2. Management Buyout
If you don’t tick all the boxes mentioned above or aren’t prepared to sell to a third party who may close your premises or otherwise shake up the business that you’ve built, you might consider selling to your management team. You know and trust them and they know your business much better than a third party buyer.
A common challenge with a management buyout is funding. Banks are often sceptical of lending large sums to small businesses so your team may not be able to raise all of the purchase price. This means that you may need to accept deferred payment terms (see below) which can make transaction more risky (albeit just as if not more risky than to a third party buyer if all of the consideration isn’t paid up front).
3. Vendor-Funded Management Buyout
If your team are the right buyer for your business but they are struggling to or cannot raise finance then deferred payment terms may be the only way to proceed. As the banker to your own deal you can be paid out of the future cash generated by the company.
If you also consider retaining a small minority interest then you should be eligible for Entrepreneur’s Relief as you receive the consideration (if structured in the right way) as opposed to paying all of the tax up front. More importantly you also have the opportunity to participate in a secondary exit in the future. There are also a number of ways in which legal security can be implemented to protect your position (for example debentures or charges over the management teams shares – after all if they are not risking any capital themselves then this would be more than reasonable).
Taking advice early on will be critical to planning for succession in the right way. For further information, please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 or email firstname.lastname@example.org
Sign up to our newsletter to stay up to date with all of our news, blogs and events