Exit planning is all about maximising the potential sale value of your business. Our lawyers will work with you to make it easier for stakeholders and competitors, and outside investors to recognise the value that you have build up in your business together with its potential for further development. You should be thinking about an exit plan for your business together with your solicitors, accountants and other advisers right from the very beginning.
Day-to-day, you will be working hard to maximise revenue by winning new customers and adding value to your services and/or products, and to reduce costs. Longer term, your hard work should result in increasing the value of your business. The key assets of your business could include customer contacts, or unique services or products.
Your exit plan will help you maximise the potential sale value of your business by constantly aligning your day-to-day activities with your long-term goals. Your exit plan will also be helpful as a focus for thinking about whether you will want to move on to other ventures or perhaps to retire.
1. Potential buyers
Potential buyers will be interested in your business for different reasons. There will be similarity between different types of buyers, but some differences and it is helpful to think about what different types of buyers will want.
- Family – They are likely to know about your business already and will want to carry on and develop what you have started. You will want to hand over the business with appropriate corporate governance procedures to ensure that the input of every family member can be appropriately dealt with.
- Management / employees – They will already know about your business, and will be keen to continue under its existing customer base and making it their own. Often they will need external funding to buy your business, and you will want to avoid as much as possible being drawn in to help that by deferred payments or earn-outs for the sale.
- Competitors – They are likely to want to buy your business to take over your customer base and business know-how in order to expand their own businesses. You will want to be particularly careful about disclosing commercial information during the sale process.
- Angel investors / venture capital funds – They are likely to be attracted to your business if it has a recurring predictable revenue (such as by subscription-based products or services) and/or a good growth pattern. In relation to the sale process, you will want a firm grip on the due diligence which are likely to be extensive to cover the downside aspects, and focus on the upside potential of your business.
2. Maximise assets
Buyers will have decided the key assets of the business that they are particularly interested in. You will want to have a separate think about what these may be and maximise their value.
- Know-how – the ‘secret formula’ of your business will need to be protected by appropriate confidentiality undertakings and other measures.
- Patents and other intellectual property - relevant filings needs to have been completed in all relevant jurisdictions.
- People – a ‘carrot and stick’ combination such as share options and restrictive covenants for key staff will be useful in assuring the buyer that the value of your business does not walk out of the door.
- Location – title to the physical location, and increasingly, domain name of your business will need to be checked to ensure that they are transferrable to the buyer.
During the sale process, these will need to highlighted and marketed to the buyer appropriately.
3. Minimise risks
All buyers, particularly institutional buyers, will want to carry out due diligence, which is the formal procedure to understand your business. They will investigate the commercial, financial and legal aspects of your business and you will need to be ready.
- Commercial – you will want to have identified the principal business risks of your company. These could be external such as dependence on a few key customers, and internal such as dependence on key employees. Buyers will need to be be convinced on how these risks can be mitigated.
- Financial – you will want achieve soundness with your cashflow. You will want to ensure revenue flow is steady, and control sources of funding which may be seen as expensive and potential tax liabilities. These will need to be thought about and options should be worked on.
- Legal – you will need to think about potential litigation that could arise in the context of your business. Your customer contracts should contain appropriate limitations on liability, and dependence on contracts with your suppliers should be mitigated. Your business should have adequate insurance cover.
4. Entrepreneurs’ relief
Entrepreneurs relief is a scheme that is open to business owners which allows them to enjoy a 10 percent tax rate on capital gains up to a lifetime limit of £10 million. You should discuss very early on with your tax adviser about ensuring that any potential sale can take full advantage of this useful relief and also the associated Inheritance Tax consequences.
5. Standard operating procedures
You will need to develop a written set of detailed standard operating procedures. Your business will need to be at a point where, if you are suddenly not around, your business will move forward without any disruption. Everything should be detailed in your standard procedures.
- Management plan – The overall strategy and management practices for your company.
- Marketing plan—The strategy and tools used to attract prospects to your company.
- Sales plan—The tools and processes the business uses to convert prospects to customers.
- Operating procedures—Detailed processes of how your business works day to day to deliver to customers.
6. An owner who is removed
If you are going to exit from the business, buyers will want to be certain that the company will function without you. If the business is only doing well because of you, then you will significantly decrease the value of your business.
7. Solid management team
Buyers will want to see a management team who is committed to the future. If it appears that most key employees have the option to leave after the sale of the business, then this will be a big negative to a buyer. As well as appropriate restrictive covenants in their contracts, you should consider share incentive schemes giving a bonus in the event of the business being sold and terms that allow the bonus to be paid out over a year or two.
8. Good paperwork
You will need to keep excellent records right from the beginning. No buyer will be interested in your business without a good set of books, and proper copies of your corporate documents and material contracts. You are likely to need professional advice from your accountants and lawyers to ensure that your paperwork is solid.
Are you thinking about an exit from your business?