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Thinking of selling? Here’s how to make a grand exit

Specialist in corporate and commercial law, Emma Ladd, senior associate at Gardner Leader solicitors, discusses why it's never too early to plan your exit strategy and steps to preparing your business for sale.
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When starting up a business, the vision for most entrepreneurs is “I want to grow a highly successful business, sell it and make a nice profit.” Whilst this is fine as a headline goal, it’s not an exit strategy.

There are many ways to sell a business, with various options and questions to consider and to plan for; and it’s never too soon to start preparing.

Planning ahead

The more time you have to plan for a sale, the better. For most, it takes at least a couple of years to prepare effectively. Grooming the business for a sale may mean changing your business strategy and putting in place tax-efficient schemes for realising your investment in the business, which may also take several years.
If you’re retiring from the business then other issues may need addressing well in advance such as finding and training a successor.

Various ways to sell

The most common way to sell a business outright is through a”‘trade sale” to another business in the same or a similar field, either directly or via an intermediary “deal maker”  who can market the business and put the transaction together for you. The other options are to sell to the existing management (known as a management buy-out or MBO) or to an outside investor such as a venture capitalist.

If you only want to sell part of the business, then you can sell a part of your shareholding or issue new shares for sale to raise additional funds for the business. This can include getting an investor to make a strategic investment in your company.

Alternatively, you can float your company on an exchange such as AIM (the Alternative Investment Market – London Stock Exchange’s market for smaller companies) selling shares as part of the process. This is a more complex and time-consuming process, and is typically part of a strategy for raising funds to grow the business, rather than simply selling out.

If you wish to retain ownership but release part of your investment, it may be possible to restructure the company’s finances and sell some of your shares back to the company.

However, your options may be limited by circumstances such as the business’ profitability and cash position or by a shareholders’ agreement, partnership agreement or a company’s articles of association. For example, if you have co-shareholders and only you want to exit, you may have to offer your shares to the other shareholders before you sell them to outsiders.

Valuing and increasing your business’ worth

Ultimately, your business is worth what someone is prepared to pay for it. Preparing your business can help to increase its likely value. To make your company an attractive investment, it’s important to show strong, consistent financial performance over the past few years. To do this, you may need to modify your strategy, focusing on short-term results as much as long-term investment plans and work with your advisers to see if there is any flexibility in presenting your financial accounts, such as minimising any provisions for bad debts or old stock.

The business will also be more appealing if it’s not wholly reliant on one or two major customers, suppliers or employees (including yourself). Low staff turnover is also a positive as it indicates a contented workforce with sound business knowledge. Ensure all systems and relationships are formalised such as written documentation for all key contractual relationships and, if any business assets such as intellectual property are owned personally by you, then you will need to assign or licence them to the business.

Minimise tax liabilities

Finally, when planning a sale and valuing your company, take into account the different tax implications for both you and a purchaser. These could include capital gains tax, income tax, future inheritance tax, stamp duty on the sale of shares and stamp duty land tax on the sale of business premises.

There are various ways to minimise tax liabilities including: structuring the sale in a certain way, withdrawing capital in tax-efficient ways or deferring tax by reinvesting the proceeds of the sale in a qualifying investment. Ensure you seek advice from your professional advisers as you don’t want to be paying tax unnecessarily.

There are many more considerations when preparing your business for sale such as whether you’ll still have responsibilities or liabilities after you sell or whether you want to release your investment and retire? Having answers to all those questions while you plan your exit means you’ll have a clear vision on what you want to achieve, how much your business is worth and steps in place to ensure the sale goes through as easily as possible, leaving you more time to focus on the importance of running your business.

Emma Ladd is senior associate at Gardner Leader solicitors.

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