Exiting will very likely be the most lucrative deal you’ll ever make, capping many years of hard work. Yet planning a successful exit can take two to three years – and many businesses erode value by engaging advisors too late in the process.
As our Road to Exit guide underlines, failure to put firm foundations in place creates difficulties in deal negotiations and may become a cause for regret.
You have an opportunity to exit your business and the outcome may be a life-changing event or give you significant investment capital for further growth. Either way it’s vital to get both the planning and the timing right if you are to optimise the value and wider benefits of the transaction.
“Selling a business you’ve poured blood, sweat and tears into is a very emotional and personal journey to go through,” says Steve Hickman, KPMG Partner and advisor to entrepreneurial and fast-growth businesses. “You have to get to a point where you have no regrets.
“The headline price is important, but many entrepreneurs are very protective towards their staff. Are my employees being looked after? Does the brand live on? These sorts of things come up when I speak to business owners getting ready to exit.”
When considering an exit, the place to start is by defining an end goal. Identify a target deadline and work backwards from there. The earlier you begin, the better. It stands to reason that exits planned carefully over two to three years are more likely to deliver higher value and fewer problems than deals that are rushed through.
A case in point is a private company currently being sold for circa £50 million. The owner optimised value by bringing in a CEO with specific sector experience and in particular, of buying and selling businesses in the sector, and by taking care in picking a strong executive and advisory team. A share option plan – put in place early on to ensure HMRC approval – meant that 30 percent of the value of the business is cascading down to employees as an incentive. This, says Steve, is a well-planned route as the owner is able to exit the business in full with a management team who can take it forward, similarly, the employees have been rewarded for their efforts.
For others the path is not nearly so smooth. Steve cites the example of a family-owned company that was set on selling to private equity (PE) investors, but hadn't prepared the business in that way, causing “significant angst”. The owners neglected to build a strong management team who could take the business forward post-exit. As a result, the transaction is on hold whilst the shareholders consider how quickly they can backfill the management roles before taking the company to market.
This illustrates the need for both early planning and optionality. It’s prudent to consider running a twin or even triple-track process, giving yourself the flexibility to switch exit strategies, for instance from a PE deal to a trade sale or stock market flotation in line with changing circumstances. After all, markets move and sentiments shift.
“Best practice is keeping every option open for as long as possible,” advises Steve. “You can’t control what happens with ebbs and flows in the wider market, but you can control getting a good management team in to take over from you, or for certain key roles. It’s your life’s work, value it! Get the right advisors on board to work with you and your management team to drive the business hard.”
Review and where appropriate renegotiate important customer, supplier and employee contracts to strengthen the appeal of your business. And ensure that your accounting policies and controls are robust, to provide acquirers with reassurance during due diligence and prevent value seepage.
It’s also vital to stay on top of tax issues. Compliance skeletons in the closet may trigger a price chip on the deal and can make for a bumpier transaction process. Taking a hands-on approach to tax risk management undoubtedly has a role to play in protecting value on exit, allowing you to reduce the amount of disclosure required against warranties and limiting potential claims against tax indemnities.
From a personal tax perspective, you should be mindful that different sale structures have different tax outcomes. Cash upfront, deferred consideration earn-outs and a reinvestment of equity in the buying company present a range of different tax outcomes for a selling owner-manager and it is imperative to understand this in order to manage the quantum and timing of tax liabilities arising on the sale. Also, some of the tax uncertainties can be addressed through obtaining advanced assurances from HMRC.
There are timing issues to consider too if you are to benefit from the most favourable rate of capital gains tax at exit. Getting it wrong could double the rate of tax you pay.
Mike Tuhme, Tax Partner at KPMG recommends clients have a “rolling tax agenda” and revisit their situation annually. Forward planning is essential as, for instance, eligibility for Entrepreneurs’ Relief, a reduced capital gains tax rate of 10 percent available to owners disposing of all or part their business, requires qualifying status to have been met at least 12 months in advance of a sale.
Get the basics right and start the process early: control your numbers, put a good team in place and decide on goals, such as whether employees should receive cash, and in what form (e.g. cash or equity) as part of the transaction.
Keep optionality in case you need to switch exit strategies, for instance from a PE deal to a trade sale or stock market flotation.
Make a three-year plan and benchmark with management information/KPIs along the way to ensure you are doing what you ought to be doing.
Review important customer, supplier and employee contracts and look at your tax affairs for potential opportunities and to mitigate risk.
For more information on putting in place a solid foundation for exit, download our Road to Exit guide or get in touch and tell us about your aspirations.
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"When considering an exit, the place to start is by defining an end goal. Identify a target deadline and work backwards from there. The earlier you begin, the better.“
“Don’t leave things until the last minute,” says Mike. “Tax can sometimes be used as a tool to knock down the price. Turn off the tap for any tax risks by being in control of the process in advance.”
It’s also vital to stay on top of tax issues. Compliance skeletons in the closet may trigger a price chip on the deal and can make for a bumpier transaction process