Exiting this year?For business owners looking to make their exit this year in 2020, this slowed enthusiasm from the investor pool shouldn?t be an excuse to sit back and wait for it to build again. There is a general sense within the business world that the optimal time period for planning a successful exit lies at approximately two years. In reality, there is no reason why preparations shouldn?t start tomorrow or even today. Even an apparent absence of suitable buyers can be tackled by making the business more attractive and maximising the sale price as much as possible. In the meantime, much of the planning will deliver improvements to the financial performance of the business No matter what route a business owner may be thinking of taking, be it a trade sale, management buy-out or attracting private equity-backed investment, there are a number of key areas which must be given attention ahead of time to ensure that the highest possible value is derived from the sale.
How’s your company’s health?First and foremost, the business? financial health is critical and can be one of the biggest issues when preparing for a sale. Ultimately, management teams must try to establish an attractive enterprise value and demonstrate that the business can continue in a sustainable fashion in the future. There are several tactics which should be deployed to achieve this, usually over a 12 to 15-month window. These include working capital adjustments, reducing debtor and trade sale days, all of which ultimately would lead to a more profitable business. As the sale values of a business are normally calculated by multiplying the profits by a set multiple, the better the bottom line, the better the valuation. It will also lead to a lower downward adjustment to the sale price as a result of working capital adjustments. Keeping a close eye on market conditions, well ahead of time is also important.
1. Get your timing rightIs the market hot and performing well? Is it stagnating and in decline? If it?s the latter, then a drastic change of strategy may be needed. If the former, now may be a good time to exit. Any business owner looking to sell-up must always take a close look at their own management structures. For almost all potential buyers, having a strong leadership team post-sale is going to be attractive. Putting this in place involves identifying individual team members? strengths and weaknesses at an early stage and shaping the management structure to be as effective as possible. Naturally, this may involve having open and honest conversations about performance and future roles, which can be tricky, especially if family members are involved.
2. Get your paperwork ship-shapeFrom a legal perspective, preparing for a sale means ensuring that all necessary paperwork is in place. Key employees should have a strong contract in place with well-considered restrictive covenants and where possible, suppliers and customers should be locked into long contracts. Both of these elements are likely to give prospective buyers an extra boost of confidence. Assessing the structure of the business itself well ahead of sale time is also a wise move ? is it set up in the most tax-efficient manner? For example, if property assets are merged with the business, this may have to be addressed in order to avoid the significant tax liabilities which would be due when the business was sold. Also, in organisations where a large number of disparate shareholders may cause issues come sale time and changing the constitution of the company could allow you to force minority shareholders to sell.
3. Have open conversations with family membersUltimately, preparation for any sale involves honest conversations about what everyone wants in the future, particularly if family members are involved. Whilst a natural successor may be clear, there are often situations where the next generation has no desire to take hold of the reins. This can throw a spanner in the works, however, by addressing the issue as early as possible, conflict can be avoided. For the seller themselves, thought must be given to how the proceeds from the sale will be used. Receiving a large cash lump sum is exciting, but without proper tax planning advice, this amount could soon dwindle and some individuals may find that their big payout does not last as long as they thought. 2020 will no doubt be a significant year for all organisations, not just family businesses. If an exit is on the horizon, planning ahead is crucial because, as with most things, waiting until the 11th hour is never a good option.
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