Navigating the business exit: Key strategies for a smooth transition

Paul Markham, transaction services partner-lead at Deloitte South West

The decisions around how and when to exit a private business are often complex, but being well prepared for an exit increases the likelihood of achieving the most favourable outcome for an owner manager.

The risks attaching to an un-planned or poorly planned exit include reduced optionality, lower buyer appetite, depressed valuation, and unfavourable sales terms.

Knowing what you want, and understanding your options

Different owners have different aspirations and requirements – whilst maximising shareholder value is often a common key desire, there are usually a number of other, often nuanced but important aspects, which tend to be specific to individual circumstances and can also influence exit options and structures.

Fully understanding the options and opportunities can put shareholders in a position to choose the route and timing that is best for the business and their individual needs. Typical exit routes can involve the following, all of which can involve differing structures and degrees of involvement – if any – post transaction, as well as their own pros and cons:

Sale to the management team
Sale to trade
Sale to private equity
Sale to employee ownership trust
Sale/succession to family
IPO
Plan ahead
Timing requirements and considerations can also impact available options.

Planning ahead is critical, as not only can it take six to nine months to sell a business once a decision has been made, in addition it can take well over a year, sometimes a number of years, to fully prepare for an exit option that will realise the true value of the business and meet shareholder expectations.

In reality, few businesses are able to fully prepare in detail for all exit options years in advance, but if you have a strong, well-prepared and managed business and clear views on preferred exit strategy and timing, then it is more likely the transaction process will run smoothly.

As part of the disposal process, the business will need to stand up to the scrutiny of due diligence and preparing for these workstreams before launching a process is vital, particularly as due diligence processes and acquirer requirements are increasing in terms of quality and availability of data.

Exit readiness

Once the possibility of a sale is on the table, ensuring the company is in the best possible position to receive a strong offer – or multiple strong offers, which can be at least defended if not enhanced through a process, is critical. Now is the time to address any issues that might have an impact on the valuation or buyer appetite prior to the formal due diligence process.

There are four preparatory steps private business leaders may want to take before considering a whole or partial sale in order to best position the business:

Adopt a buyer’s perspective

Focusing on both strengths and weaknesses from the perspective of a buyer is important in advance, so there is ample time to highlight value-enhancing advantages, and to address any inadequacies. Bringing in an outside perspective can help pinpoint improvements as well as extolling the opportunities that will lead to better offers.

Focus on quality of earnings

Many entrepreneurs achieve success through a blend of smart financial and operational management, as well as gut instinct. When it comes to selling, buyers will be far more interested in the former. This is where the quality of earnings report comes in – it shows what aspects of the company’s financial performance are repeatable and which are nonrecurring. The potential buyer will also be looking for justification for growth targets, particularly in any new business streams that don’t yet have an established track record.

Get ahead of tax and legal issues

Tax and legal matters can have a significant impact on value in a transaction, as well as cause due diligence processes to extend. Sellers should fully understand and be able to clearly explain the business’s legal and tax attributes to a potential buyer to help ensure a smoother process with “no surprises”.

Take steps to enhance and protect your net proceeds

Wealth planning may seem less important than getting the business ready for sale and closing the deal, but there are steps business owners can take in advance to potentially reduce their tax exposure from any sale, as well as future structuring. Early personal tax and wealth planning ahead of any sales process can materially enhance the final portion achieved for a shareholder group.

How we can help

Paul Markham leads the transaction services team at Deloitte South West providing a full suite of transaction services to a wide range of clients including privately owned, private equity and capital market backed clients.

To find out more about how the team can support your business, email pmarkham@deloitte.co.uk.

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