Preparing for sale in an uncertain climate
Brexit still looms over the UK M&A market, with an unknown outcome causing doubt around the future of the economy. However, no matter how unstable the climate is, businesses will always want to buy and sell. In fact, for the SME market, which relies less on global supply chains, good deals can be found, and open exit routes are available.
There are multiple reasons a business owner might want to sell. For example, a wish to develop other ventures, or most commonly, wanting to retire. Regardless of the reason, ensuring the best sale structure for both the individual and the business is of highest importance.
Our corporate partner, Keith Spedding, explores what you need to consider when structuring for a sale:
The 2008 financial crash halted many businesses’ plans to sell. Those that had aimed to retire are, therefore, still working and are unable to move on until their business is sold.
SMEs were hit hard by the financial crisis, with organisations having to cut back their second-tier management to lower costs. Owners were left to run businesses directly, keeping them afloat in the short term, but limiting their future exit options.
There are four main exit options for SMEs:
Private equity sale
An external investor purchases the business with the aim of increasing profitability and selling it on again.
The company is bought by a competitor who wishes to use the existing connections and customers of the acquired business to advance their own.
Employee ownership (EO):
EO involves employees becoming shareholders, the most famous example being the John Lewis Partnership. This model is becoming more popular, with a sense of equality being created due to staff having more of a voice. Solid second tier management is needed for this type of sale and is usually undertaken by businesses who want to continue independently, while also rewarding loyal employees.
Management buyouts (MBO) and vendor-assisted management buyouts (VAMBO):
If a management team approaches the business owner for a sale, with either private equity or bank backing, this is known as an MBO. A VAMBO involves the seller deferring payment for the business and approaching management for a sale themselves. Experienced second tier management is required to undertake either of these options successfully.
The form of sale chosen depends largely on the structure of the business. If there is credible second tier management, an MBO, VAMBO, or EO sale is possible. If not, options could be limited to private equity and trade sales.
However, if an immediate sale is not necessary, and there are people within the company who have the potential to become second-tier management, then other options can be opened up. Training staff to have the knowledge and skillset for second-tier management is not a quick process, but it will allow the company to remain independent.
When considering options, assessing long-term goals and results is vital. If a private equity sale is opted for, then owners must be able to accept that the business will likely be quickly sold on again. Equally, with trade sales, the idea that the company could be run differently to gain greater income, or even closed to remove competition, is something that must be come to terms with. For MBOs, VAMBOs and EO structure, being sure that successors are willing and capable is very important if the company is to have continued success.
Choosing an unsuitable sale option can cause multiple issues. For instance, if second-tier management is not solid enough to be involved in an MBO scenario, both staff and management can be left feeling disgruntled and under-pressure to recover the business themselves. An unpleasant environment could spring from this, causing a potential loss of staff.
Trade sales are also not without risk. A level of vulnerability comes from allowing competitors access to the information needed for an acquisition, as it could be used to their advantage. Loyal customers may also become wary of the business, as trust is lost.
Exiting your business is not a simple decision. Many aspects need to be taken into consideration and it is not something to be rushed. The priority must be the future success of your business.