It’s never too early to start thinking about your exit

By Adam Stronach, head of corporate finance at Harwood Hutton

Planning for succession and ultimate exit is extremely important for company owners and directors.

Deciding to sell is one of the most momentous decisions an owner will ever make. Yet business owners often neglect the issue because they find it hard to escape from the day-to-day pressures of management and create the space for some clear thought.

It is true that the process of sale is likely to be more emotionally demanding, stressful and time-consuming than many imagine at the start of the process. However, those who approach the process in a controlled and structured way are far more likely to achieve their ambitions.

Deciding to sell
There are many reasons you might consider selling. It may simply be that someone has approached you and this triggers the process, or it may be for personal, commercial or financial reasons. Let’s look at those in turn.

Personal reasons
Personal reasons are the most common reasons for sale we see in our client base. Examples are:

• You want to spend time with the family / pursuing a hobby
• You wish to realise the cash tied up in your business
• You are in poor health
• There is no obvious successor within the family
• You no longer wish to manage the risks of your business, which may have become more onerous e.g. as a result of increased sector regulation or changing technologies.

Commercial reasons
• Rapid Growth – there may be such rapid growth that the business expands beyond your skill-set, experience or comfort zone. Often this will be accompanied by an awareness of the increased value of the business and the increased risk that may be attached to it. A desire to cash in at this stage, perhaps by way of a sale, is understandable.
• Need for a strategic partner – this could be as a result of rapid growth which can only be fully exploited by being part of a larger business or group to give your business access to a wider market.
• Market consolidation – In a consolidating market the potential buyers may be easier for you to identify and the benefits of a sale based on market share or geographic presence may be clear. Generally, this will be a time-limited option.

Financial reasons
• Capital is needed for expansion – it may be at this point that an external investor is required to fund this expansion, but rather than take this step, you opt for an outright sale.
• Shareholder influences – your company may have multiple shareholders and there may be a particular group of shareholders who want to sell. This is often the case where there has been a successful Management Buy-Out (MBO) or a successful start-up. It may also be the case that there is a dispute among the shareholders leading to the sale of some or all of the business.
• Underperformance – your company is underperforming and you just want to cut your losses and salvage what value you can from the business.

Objectives of selling
Much like business owners have many and varied reasons for selling, they may also have varied objectives for what they want to achieve from a sale. To be prepared for selling your business it is vital to have a clear idea of what you want to achieve from an exit. Some common objectives are:

• Maximising the total value received for your business
• Maximising your cash received on the day of sale
• Achieving a clean and immediate exit without earn-out or other tie-in
• Achieving financial security
• Pursuing a new venture or hobby
• Retiring early
• Preserving the well-being of existing employees, possibly rewarding them via the opportunity to mount an MBO
• Maintaining existing relationships with customers and suppliers
• Keeping the vendor’s name above the door.

Anticipating tax changes
Tax can also be a factor when considering an exit.

For example, there has been speculation in the financial press that Capital Gains Tax is likely to be hiked in the near future as the Government seeks ways to raise revenues in the aftermath of Covid-19.

But my colleague Cormac Marum, who is Harwood Hutton’s head of tax advisory, says there is a danger business owners may not realise the true value of their enterprise if they let the tax tail wag the commercial dog.

A potential change in tax rate may not be a natural point where it makes sense to consider an exit if a later deal may present significantly greater value, notwithstanding a higher tax rate.

Getting the best return
If you think about all of the aforementioned points enough, there is plenty of scope to prepare your business for sale and to achieve the best possible return for your endeavours.

Harwood Hutton was Finance Monthly’s Deal Maker of the Year in 2019 and 2021 and Adam Stronach was voted England’s leading practitioner for business valuations by Corporate International in 2021.

So you can be confident that our team of corporate growth specialists has all the skills and experience you need to facilitate the successful sale of your business.

Given our extensive network of connections, we might even be able to open the doors to the right partner, not just here in the UK but overseas.

Contact Adam on 01494 739500 or email him at adamstronach@harwoodhutton.co.uk