You set up your own business and have been successfully running the enterprise – but what should you consider if your thoughts begin to turn to selling the business?
It’s a question that every private enterprise owner probably comes to eventually. And if you are looking to make an exit of some sort, there have been few better times to act. The market is buoyant with a high number of deals taking place. On the trade side, many companies are looking to acquire and expand and are scanning for opportunities post-pandemic. Private equity houses have built up significant capital through the pandemic which they’re now looking to deploy. KPMG analysis finds that there was the highest level of mid-market PE activity in the first half of 2021 for four years – with 377 deals at a value of £20.7bn. What’s more, valuations remain healthy meaning that you could expect to get a good price for any stake that you sell.
Then there is tax. It is widely anticipated that Capital Gains Tax (CGT) rates could be increased at some point in the future. So for anyone looking to sell their business, getting in ahead of any increase could save a significant amount of cash in the net proceeds you receive. It’s a further incentive to act sooner rather than later.
Trade sale or PE deal?
There are two main routes for selling all or part of your business – a trade sale to another company, or a Private Equity (“PE”) deal. So the first step is to consider which one suits you better – and that depends on what your motivation and objectives are.
If you’re thinking about making a complete exit, then a trade sale is probably the best route for you because PE houses will likely only take a (majority or minority) stake. So, if you’ve decided the time has come to retire and enjoy all that quality time you’ve been promising yourself for so long, a trade deal would be the best way to make that happen. It would also be the route to go down if you wanted to sell the entire business and then set up a completely new venture with the proceeds.
The PE avenue really comes into play if you only intend to sell a proportion of the business. A common scenario is where the owner knows there is potential for the company to really grow and expand – but needs a capital injection to help make it happen or accelerate the process. Not only will you personally receive a payout for the stake you sell (although the PE investor will almost certainly require you to channel some of this back into the business), the PE house is likely to put more money into the business to achieve the growth plan. Their aim is usually to expand the business over a 3-5 year timeframe under their ownership and sell at a higher value, achieving a strong return for themselves and you.
Another common attraction of a PE deal is that it enables you to take some money out of the business and de-risk your financial situation personally. Private enterprise owners often significant personal wealth tied up in the business, and a PE deal helps begin the process of extracting it.
With PE deals, it’s really important to think about how big a stake you’re happy to sell. A sale of a minority stake means you’ll get less money on day one – but will remain in control, with the support and input of the investor. A sale of a majority stake means you’ll get more money on day one – but will be ‘answerable’ to the PE house. You’ll still be running the business, but ultimately they are now the owners.
What often happens in our experience is that sellers are happy to take a dual-track approach – gauging interest from either trade or PE, and then weighing up what is the most attractive option for them.
Advisor to manage the process
To embark on the process, it’s essential to get a good advisor on board. They can talk through the options with you and take on the work of preparing all the information you’ll need to provide to prospective buyers. This will include robust and detailed management information (accounts, cashflows, assets, debts, liabilities etc) and a growth plan for the coming years. There’s also the option of having the advisor carry out a risk review (perhaps even avendor due diligence exercise) to identify any issues that may need addressing ahead of a sale to prevent any deal blockers (or price reductions!).
If you’re looking primarily at a trade sale, then bear in mind that what will be top of mind for a buyer will be where the synergies lie between your businesses – what opportunities for cost efficiencies and economies of scale are there whilst also increasing their market share/customer base? PE buyers, meanwhile, are more likely to be focused on the growth plan of the business – what potential is there to increase market share, revenue and profitability? They’ll also be very focused on your management team and assessing their strengths and quality.
Creative approaches courtesy of Covid-19
A good advisor will prepare a compelling prospectus (Information Memorandum) and will get busy on your behalf, reaching out to contacts and networks to start creating interest. They can also help you devise creative ways of showcasing your company. For example, through Covid-19 when physical site visits often weren’t possible, we have helped a number of sellers put together drone footage and virtual tours of their business. This can really bring your company to life!
Another feature through the pandemic has been an increase in virtual meetings over Teams/Zoom and e-signing of key documents rather than physical signing events. These all save time and make the process more efficient.
I would expect many of these features to remain popular even after the pandemic has fully subsided. Ultimately, it’s about creating a process that works for seller and buyer – and achieving a successful outcome!
Time to act?
If you are thinking about selling, early engagement with an advisor can really pay dividends. There’s so much to think about and being clear from the outset can make the process much smoother. Selling your business can be an emotional rollercoaster – but a good advisor can take the strain and be with you all the way, from first conversations right through to the big day of deal completion itself.