Selling a Privately Owned Business – Briefing 4 – Exit Strategies
As owner you have a number of options for exiting your business. These will all differ in outcome and not all will fit you and your circumstances. In a logical sequence, the options are as follows.
Always the least attractive option other than in exceptional circumstances. Normally a “last resort” where other options are exhausted. Even for small businesses the basic principle is that a business is worth more as a going concern than on a break-up basis, where the owner will only ever achieve less than asset value once liabilities and costs have been met.
Some businesses are worth more to an owner through entrepreneurial drawings than they are to the market through normal value on sale. One option is thus to take a “step back” from direct control of the business, putting in place appropriate management while you as owner maintain an executive and strategic “hands-off” role. The risk lies in finding the right management to run the business successfully to produce future dividends for you, and whether circumstances no longer under your control may adversely affect the future of the business.
Often the preferred route but relies upon the availability and capability of family members to carry on. Usually requires a significant grooming period, often combined with the need for ongoing support and continued responsibility by you as outgoing owner. Full value is rarely available immediately on transfer and thus a longer term view on achieving value is usually required.
Sale to Management Team (MBO)
Another common method particularly for businesses where a strong management team is in place, and may be seen as a “ready made” buyer. However, management often do not possess sufficient funds to pay maximum value and price is often determined simply by the management team’s ability to raise capital. Longer term involvement is almost always required from the outgoing owner to secure the balance of value, with commensurate risk.
A kind of corporate “Management Buy-In”, where a company, often in a related field, buys a strategic stake in the business, allowing you as owner partial release of equity, with you continuing to run the business prior to an agreed final exit and full equity release at an expected higher value.
By far the most common – and arguably the best method of achieving maximum value on sale. Another trade buyer, generally larger and more powerful, will be able to drive higher future value through the synergy of bolting together the two businesses. Trade buyers are thus usually willing to pay a “premium” price for the opportunity of acquiring the business and securing future growth and value.
Stock Market Flotation
In practice rarely a realistic option for the entrepreneurial business. The business must have reached sufficient size and growth profile to attract external investors, and generally the costs are prohibitive. A flotation is not a full exit for the outgoing owner who will have to retain some capital and remain with the business for a period post sale.
6 June 2017