I'm Thinking Of Selling My Business. What Are My Options?

Many business owners do not appreciate the importance of having an exit strategy. Embroiled in the day-to-day life of running a company they give little thought to what happens when the time comes to step away. Yet a properly thought-out and well-executed exit strategy is no less important than that business plan they laboured so hard on all those years ago.

As with the business plan, getting the exit strategy right has long-term consequences, for good or ill. Not only will it enable owners to get the best price they can, it will minimise post-sale risks; no one wants litigation clouding an otherwise peaceful retirement or hanging over a new venture.

In addition, many owners are simply not aware of the full range of exit strategies and this means they won’t extract the maximum value from their company. So, if you are thinking of selling your business what are the options?

Merger or sale

The company is sold to another business, often a competitor, and for many owners this is the most attractive option. The buyer is likely to want to use the purchase to increase its market share, eliminate you as a competitor, acquire your staff or supply chain or your products or services. 

The buyer may retain the company as a separate entity or absorb it, depending on the business plan.

The advantages of a merger or sale is the seller will have some control over negotiating a price and may if fortunate be able to attract multiple bidders, thus pushing up the sale price.  

However, the process is potentially complicated; it can be difficult to know how to price the company correctly, and the buyer may pull out at any point. Buyers will also want to undertake thorough due diligence, which is time consuming to deal with and potentially intrusive.

Good will and assets sale

This route is typically taken by a sole trader or small limited companies. The tools and assets and customer list and intangibles of the business are sold. The owner is then left with the task of shutting down the company. Goodwill – or intangibles – is things like your contracts, trading name and reputation, and assets are the physical assets of the business. A buyer may want both of these or one or the other. 

Buyers are unlikely to want to take on debts or litigation or any other liabilities, and third party approval, for example, from a landlord, may be needed. However, because liabilities usually stay with the seller, goodwill and assets sales tend to be quick because the buyer has less due diligence to do.

One thing to watch out for is that sellers often find it hard to calculate how much tax they owe. In some cases they have ended up being taxed twice. They can also lose the value of intangibles they have bought, for example, licences or permits, that are not transferring to the buyer.

On the plus side, apart from the subjective nature of valuing goodwill this is a straight forward way to sell a business. The seller will be largely free of obligations such as warranties and indemnities after the deal has gone through and can keep parts of the business, eg, vehicles or tools, depending on negotiations.

In addition, sellers should have the upper hand in price negotiations since they will have the most accurate idea of the value of what is on offer.

Sale to partner or investor

This method of passing on a business minimises disruption to staff and customers, thus maintaining trading income. Furthermore, the business should be in good hands if it is taken over by someone – known as a friendly buyer – who has already had a role in running it or has invested in it. In addition, the buyer is likely to have a long-term interest in the business’s success. However, the risk is that the price obtained is less than what it would be on the open market.

Part-sale

Rather than getting out of the business entirely the owner will sell a stake in it. This can be a majority or minority share, depending on whether or not the deal involves the owner ceding control of it. Selling a minority stake can work well when the owner needs investment but wants to continue to run the company.

Liquidation

Closing the business is suitable when the company is failing. Assets are sold and debts repaid in full or in part. If there are any shareholders they need to be paid out. The downside is that once liabilities are cleared there is not likely to be much left over for the owner.

The business does not need to be trading badly or insolvent, the owner may simply want to get out, typically this could be because of reaching retirement age and not having suitable buyers or relatives or managers to take over. Liquidation can take the form of a members voluntary liquidation, for which professional assistance will be needed.

Bankruptcy

Going bust does not require too much in the way of strategising or negotiation. Companies that file for bankruptcy have their assets seized and have minimal access to credit thereafter. But owners can walk away from the unsuccessful business although they will struggle to get loans or find investors for future ones. Bankrupt owners will also be unattractive options for management or board roles elsewhere.

Family succession

This method can be appealing for those who want to retain some involvement in the business, say, after early retirement or as estate planning for owners who are advanced in years. It obviously depends on there being a suitable family member who is ready to step up and take the reins. One positive here is that the relative can be groomed for the succession so the change of ownership can be accomplished with minimal disruption. On the other hand, family feeling and conflicts may interfere with the running of the business. 

Acquihires

This unlovely term refers to when a company buys your business because it wants your employees. The seller should be able to get a good price for the business because the buyer obviously values the staff and will pay accordingly. 

The disadvantage is that it is often difficult to find buyers for this kind of acquisition and, like a merger or sale, the process is involved and relatively expensive.

Management and employee buy-outs and buy-ins

Owners will sometimes sell part or all of their business to the management team or a group of employees. This method is good for business continuity and most likely ensures the company continues to be well run and heading in a direction the owner is happy with. 

However, in many companies the managers and employees will not have the skills to takeover the company and profitability may take a tumble. Also, the necessary internal restructuring may take focus away from customers and product development, again harming the business. 

In the case of a management buy-in (MBI), a new management team buys into the company. Another option is the buy-in management buy-out (BIMBO) when an incoming manager and an existing team buy the business. 

All of these can be relatively quick and efficient means of exiting a business; however, care needs to be taken with MBIs and BIMBOs that the internal team and the new management are aligned.

Initial public offering (IPO)

Going public is not usually an option for a smaller company as listing on a stock market and the associated regulatory burdens are expensive, and the business would not be well known enough to attract investors.

In addition, while an IPO can make entrepreneurs rich, in some cases extremely rich, they must also deal with at times unwelcome scrutiny from regulators, analysts and the public, and they have to be accountable in a way they never had to be before.

Need help with planning your exit strategy? 

Clearly, there is a lot to think through and research before picking on the optimal exit strategy. Particular challenges are finding a buyer, managing negotiations and setting an achievable price that does not undervalue the business. This is where expert advice from outside the company can be invaluable. 

For more information please see our article How To Sell Your Business: The First Steps.

The accountants at Finsbury Robinson can give you all the help and insights that you need, so, if you are thinking about exiting your business, or just want to draw up a plan ahead of time, please give our friendly team a call on 020 88584303 or email us at info@finsburyrobinson.co.uk

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Angus Walker 10.07.2024