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.
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.
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
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.
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.
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.
9 September 2019