The pandemic accelerated an already growing number of business owners considering an exit from their companies – whether for reasons of work-life balance or simply a desire to change industry or location. In his latest series of articles, Corporate Partner Euan McLaughlin, looks at some of the exit routes available to business owners.
No 1 - External Sale.
When most people think of exiting a company, they think of selling to an external purchaser. This remains the most common exit route in our experience. There are many potential categories of purchaser, including:
- Competitors seeking to expand their market share;
- Suppliers or customers seeking to vertically integrate their supply/distribution chain;
- Corporates looking to add to the business lines under their banner; or
- Pure investors (whether private equity, venture capital or simply wealthy individuals) looking to acquire the business as an income stream and/or capital growth opportunity.
There are a number of steps you should take prior to seeking an external sale. Amongst other things:
Most companies start off small and develop over time. This can lead to all sorts of anomalies, from messy shareholder structures to internal arrangements which might not meet the compliance requirements of a larger purchaser. A full review of the company from the perspective of a purchaser is a must to identify and (where possible) eliminate historical issues that could lower your sale price – or even put a purchaser off altogether;
An audit should be taken of the company’s employees, to verify that legally compliant and appropriately robust arrangements are in place. This is particularly important for key/senior employees who the purchaser may consider it essential to retain;
Similarly, an audit should be undertaken of the company’s key suppliers and customers – for example, are they on robust written contracts? Is the company unduly reliant on a small number of suppliers/customers, and if so how financially secure are they?
How essential are you personally to the business, both in the short and medium term? It is typical for a seller to remain within the business for at least a short period (say 6 months), but in some industries/businesses the buyer may require significantly longer.
What information are you planning to share with potential purchasers, and how commercially sensitive is the information? This is a difficult balancing act, as of course you will need to provide a certain level of confidential information to elicit serious/sensible bids.
Do you have the right people in place to complete a transaction? Are your current accountants and solicitors sufficiently experienced and knowledgeable of all areas required to complete the transaction? If not, who will you approach? Who needs to be involved from within your business, and how can you manage their normal workload on top of the transaction?
Once you have completed your pre-sale housekeeping, your next step is to identify potential buyers. Using a company sales agent might not be the best route if you know your industry well and have a good idea about who the potential buyers might be. However, a corporate finance adviser might find buyers outside of your industry and they can often add substantial value to a sale, particularly if they know the sector well. Any potential buyer should be asked to sign a well drafted NDA prior to receiving detailed information about your company.
Prior to dealing with detailed legal documentation (the first draft of which is usually prepared by the Buyer’s solicitor), it is always a good idea to require the Buyer to sign up to Heads of Terms (sometimes known as Heads of Agreement, a Term Sheet or Letter of Intent). This sets out the key details of the proposed transaction. It can save you a huge amount of time and cost to get these details ironed out at an early stage – either because they limit the scope of future negotiation, or because they identify fundamental difficulties at the earliest possible stage.
Thereafter, it is a case of negotiating and agreeing the main transaction documents, and (metaphorically or literally) sailing off into the sunset!
The Corporate Team at Sills & Betteridge have a huge depth and breadth of experience of company sales and purchases, ranging from owner-managed SME businesses to large national and international corporate groups. Please contact Euan McLaughlin on firstname.lastname@example.org or 01522 700490 if you would like to discuss your situation and options.