Thinking Ahead: the secret to a successful exit

Selling a business for the price you want (or need) will never be an easy task.  Counter intuitively perhaps the way to do it is to think ahead and think of others first.  Private equity investors joke that they look for only three things in a business:  management, management and management.  To create your great business with its systemised processes and rising profits you are going to need to attract, to motivate and to retain a great management team. So having set your own personal objectives (the sum net of tax needed for your own retirement) you must next think of how to reward your team. The art of management it is said is to get others to do what you want them to do because they want to do it!

Here are our top 5 tips for thinking ahead:-

1. Take stock with independent advice

Take independent advice from someone skilled in selling businesses on what they would think:  their answers might surprise you in either a positive or a negative way.

There is an old adage:  “buy from a fool and sell to a fool”.  Planning to find a foolish prospective buyer would not, of course, be a wise strategy.

The right, wise and skilled intermediary will be able to give you an honest assessment of where you and your business are now.

2. Consider the strengths of you and your current team

As you get tied up in the day to day and your plans for growth it is all too easy to fail to recognise and appreciate the contribution of your current team. If you have an invaluable team member, how can you lock-in and motivate that person?  A salary and a good bonus may not be sufficient.  A different type of challenge and reward may be what is needed.

Building a tried and tested team will likely be the best way forward.  You do not want to lose key people.

3. Consider the alternatives to a straight sale of your business

Where you have a great team with rising profits in an expanding market sector a straight sale can be a good way to exit.  That sale could be to a competitor (risky perhaps but the potential for you to be paid the best price) or a company with complementary products or services or to a financial buyer.

Consider too whether your own team could be a credible buyer.  Most business owners and their advisers will cry at this stage, “do not be daft, they have no money”. If your business and the team is good enough finding the money for them will not be an insurmountable task. A technique that can be very motivational for you and your team is a vendor-funded management buy-out.  You act as a benign investor and lender yourself and allow the team (via a Newco) to acquire the business out of its future cash flow. That buy-out could see you retain a significant minority interest.  It could be a stepping stone for you and the team to grow the business significantly and together do a much higher value trade sale in 10 plus years.

4. Properly design your share option scheme

You will want to work with skilled and experienced advisers to properly design your share option scheme.

If a vendor-funded MBO is your preferred route to exit you will likely want zero cost options for your team under the Enterprise Management Incentive legislation.  To achieve this you will need to reorganise the share capital of your company.  A bonus issue of preference shares (a fancy IOU to you from your company) will do the valuation trick allowing you to award shares at a very low cost to your team. You want to be clear about what happens if key team members leave:  what buy-back rights do you want that are fair to them and to you and are practical to operate?

5. Communicate the plan professionally and effectively

An employee share scheme (grounded on a credible exit plan for you) that is not properly communicated will not be understood.  This will mean it is not motivational and you may as well not have bothered introducing it (instead just offer simple cash bonuses for performance).

You will want your advisers to help you present the plan to your key team members.

Final Thoughts

Brexit means change and uncertainty for business but that change could represent opportunity for you and your team.  None of us are immortal and the word Exit can be an uncomfortable one for a lot of us. As our top tip 3 made clear Exit need not mean Exit for you and your team.  Planning that share option scheme around your exit plans could (and should) be the start of an exciting new beginning.

What are you waiting for?  We would love to hear from you.

For further information on succession planning, please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 or email everyman@everymanlegal.com