When to sell your business: A fresh take on pre-exit

By Jonny Parkinson, Managing Partner, Marktlink
If you’re a UK business owner looking to sell your company, you’ll find plenty of information on pre-exit planning, but pre-exit can also mean something else.

This alternative definition of pre-exit refers to selling your business in phases.

For owners interested in attracting private equity, this phased pre-exit approach offers several benefits as an alternative to selling outright.

I’ll explain further what pre-exit means in this context and why it’s an increasingly attractive option.

What does Pre-exit mean?

With a pre-exit, you don’t sell your business in its entirety. Instead, you keep a minority or majority stake in it and sell the rest.

This arrangement stays in place for an agreed period, aligning with the hold period of the private equity house, which can typically vary from three to seven years. Once this period ends, you can usually look to dispose of your retained stake fully to its new owner.

However, before this, during the pre-exit period, you stay actively involved with your company.

A private equity sale of your business allows you to transform your company into an investment opportunity and bring on board a supportive partner to facilitate further growth.

It’s a quid pro quo. You sell part of your business. In return, you attract investment that grows its value when you come to complete the transfer and hand over the remainder.

The type of investor you attract can vary, from private equity firms to family offices or high net worth individuals. But the principle remains the same – you stay involved while your acquirer helps you build value in your business. Pre-exit is an intermediate step but also potentially a highly lucrative one.

Why are business owners more interested in private equity?

Previously, where business owners might have seen trade deals as an ideal, no-nonsense solution to selling up, now they are more aware of challenging market conditions and what it takes to overcome them.

Maximising the yield from selling your business takes a long-term strategy. Of course, serial entrepreneurs have always known this, but private equity is changing the thinking and approach of more and more business owners. They are finding they can optimise their operations, enhance performance and grow their enterprises. In effect, they transform their businesses before wholly selling them.

Private equity is in a stronger position to compete because, simply put, there is still a lot of money out there. This investment dry powder is around $3.7 trillion globally. Investors are looking for ways to spend their money. Business owners are responding.

Accountancy Daily reports that 20% of business owners are looking to sell to private equity – 11% plan to sell a minority stake, 9% a majority stake.

Other external factors influence business owners to look at pre-exit as an answer. They may feel pressure to accelerate their exit plans to protect themselves against future changes that threaten to sabotage their sale.

One such change is a new party in government. The latest date for a UK general election is January 2025. Should Labour get in, there may be scope for alterations to capital gains tax (CGT), bringing it more into line with income tax. Currently, the shadow chancellor says there are no plans for this, but following an OTS report review of CGT in 2020, the prospect of a change has been more rather than less likely.

Other factors prompting business owners to consider selling earlier are obstacles to accessing capital and long-term investment. Many businesses report these difficulties. The paradox is that in choosing to begin part-selling their companies, business owners can start to attract interest and investment that otherwise can be conspicuously absent.

How does a business benefit from pre-exit?

Businesses benefit from pre-exit in a variety of ways. Owners can grow their companies to build value before selling them in full. Greater investment means they can attract more talent and address any knowledge or skills gaps. They can still be part of their business but work less, should they choose, reaping the rewards of their hard work sooner. Finally, as their capital is no longer fully tied up in the company, they can spread their risk.

Furthermore, pre-exit can be less disruptive for employees, customers and stakeholders because it builds a high degree of continuity. Ultimately, the injection of investor cash and expertise should ensure the company is stronger and more competitive when the complete sale goes through. In the run-up, pre-exit reduces the risk for the owner and shareholders by spreading it more evenly.

Alignment is the key

Ensuring the future success of the business becomes a shared responsibility. It requires an alignment of objectives. For us, at Marktlink, the task is to find suitable acquisition partners and foster relationships that will make a pre-exit work for everyone involved.