Q&A: What are the options for exiting my business?

Problem:

I’m approaching my fifties, have a growing business and I now want to give some serious consideration to building it up and exiting. Some of my contacts have told me there are several ways of getting out but I have no idea where to start. What are the options? 

Our response:

While some business owners will be savvy with the process of exiting a business, and even have been through it themselves previously, there are others who will have owned and managed a business for many years, perhaps a family firm, and not be familiar with what their options are when they decide they want to pass on responsibility for the business. Here is a back to basics overview of the various options.

Trade sale

The most common exit route is selling the business through a trade sale to another business, private investor, or your employees through a management buyout (MBO). Generally speaking, a trade sale will often attract a higher sale price but will also depend on a clear exit strategy, often involving a staged withdrawal from the business and the sale price being paid in instalments over a period of time. This process is known as an earn-out and is a period in which the business must demonstrate it has a sustainable customer base and a consistent rise in profitability.

Management buyout

A trade sale often involves selling to a competitor and some business owners can be uncomfortable with this idea. Some will prefer to sell to their employees through an MBO because it enables them to pass the business onto people who know the business from the inside and who they can trust to continue running it in line with its traditions and ethos. For some businesses, this may be the only option if a trade buyer is lacking.

The drawback is that buyouts usually result in less cash consideration received on completion than trade sales because, usually, employers find it difficult to raise funds as easily as a trade buyer. However, it is not uncommon for sellers to accept a lower price from management because they want to see them being given a chance to grow the business for themselves.

Private investment

A partial exit route could be presented in the form of a stock market flotation, or securing investment from an external investor, such as a private equity or venture capital business, though this is normally only available to larger and rapidly growing companies. While it would allow a business owner to sell part of their stake in the business, potential investors will expect them to retain some shares. Also, the real purpose of such a move is to allow the business to access a wider source of growth funding and thus, a partial exit should only ever be seen as a by-product of the process, not the aim of it.

Closing a business

While it’s probably the least appealing option, certainly in terms of a financial windfall after many years of hard work, closing a business doesn’t always have to be seen as a negative move. For example, a business may be too dependent on the owner’s individual skills to make a sale realistic, or family members might not want to get involved to continue running it.

As always, no two business exits are the same. What is appropriate depends upon the nature of a business, its future prospects, and, perhaps most importantly, the ambition and aspirations of the exiting shareholders.

For more information on selling your business, or help with any other matter relating to mergers and acquisitions, contact David Filmer on 01772 258321 or David.Filmer@harrison-drury.com