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Selling a Privately Owned Business – Briefing 2 – Exit Strategies


In this second in our new series of Blogs on the sale of small privately –  owned businesses, we’re looking at early planning for a sale, and the various options open to owners.

Private owners have a number of options for exiting their business.  These will all differ in outcome and may not be appropriate to all circumstances.   We’ve already looked at the first and often preferred option, family succession, and in a logical sequence, other options are as follows.

Replacement Management.

Some businesses, by their nature, are worth more to an owner through entrepreneurial drawings than they are to the market through a sale. One option is thus to take a “step back” from direct control of the business, putting in place appropriate management to run the business, while you as owner maintain an executive and strategic “hands-off” role.  The risk lies in the management’s ability to run the business successfully to produce future dividends, and whether external circumstances may adversely affect the future of the business.

Sale to Management Team (MBO)

Another common method particularly for businesses where there is a strong management team, who 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, again with commensurate risk.

Corporate Venturing

A kind of corporate “Management Buy – In”, where a company, often in a related field, buys a strategic stake in the business, allowing the owner partial release of equity, whilst continuing to run the business prior to agreed final exit and full equity release at an expected higher value.

Trade Sale.

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 is 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 small 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 capital and remain with the business for a period post sale.

Ceasing Trade.

Always the least attractive option other than in exceptional circumstances.  Normally a “last resort” where other options are exhausted.  Even for small owner-managed 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.

Posted on by Mike Halls

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