Growing a business for a successful exit

Business owners often dream of starting and building a business but very few visualise a successful exit at the end of it.

But after years of hard work and as a business grows to reach a certain stage, this can become an ever more tempting goal – securing the future of the business and for its founders. 

What do you need to consider when building a business to achieve a successful exit at the end of it?

Prepare the business for sale

However well a business is run, there are always issues that arise out of the due diligence process on a sale which can ultimately impact on the price achieved. 

It is sensible to consider all aspects of the operation of the business being sold well in advance of engaging in a sale process. This can often involve some proactive due diligence to “smooth” the sale process and maximise sales values.

Find the perfect partner 

Are they already operating in your sector? What’s their reputation like? Are they the right size? Is there a good fit between what they lack and you offer? 

It is inevitably much easier to prepare for sale with focus if you have already identified potential buyers for your business.

Agree a timeline for sale and work steadily towards it

And give yourselves enough time! A sale process from start to finish can take a year to 18 months and this is the timeframe owner managers should bear in mind. 

Often an investor memorandum will need to be prepared, which is effectively a comprehensive brochure on the business including historical financials and forecasts. 

As part of the production of this document, the board will need to undertake its own forensic analysis of the business – this is a time consuming exercise.

A word of warning – a sale process is highly time consuming for management.  It is key that managers do not take their eye off the ball when it comes to actually running the business during this period.  

Any potential buyer will want to see up to date management accounts and if management do not remain focussed on the business while preparing for sale, performance can fall and this can then scupper the sale itself, defeating the whole object of the process.

Agree what a successful exit looks like 

All shareholders will need to reach a conclusion on this together. The consideration can involve many different structures, both as to form and timing of payment.  

Sellers need to consider whether they are willing to accept any paper consideration, namely shares in the purchasing company. 

There is also the question of whether an earn out – allowing the seller of the business additional payments based on its future performance – would be acceptable or desirable as part of the consideration. This will often be driven by the desire (or perhaps a distinct lack of desire!) of the management to remain with the business after completion.

Have a clear insight into the current value of all your assets

This includes tangible and intangible assets, such as IP and goodwill! Best practice is for a business to undergo an “honest” internal legal and accounting review well in advance of sale. 

While this may sound unappealing at first, it allows the business to address issues identified and take preparatory steps to maximise the asset value of the business.

Consider the impact on staff 

The sale process can be a worrying time for staff, so consideration should be given to any employees who may automatically transfer to the buyer on completion. 

Sellers are legally obliged to inform and consult with staff throughout the process and must provide key information about them to the buyer, who will inherit all liabilities attached to the employees once the transfer is complete. Keeping a strong dialogue with both staff and the buyer will help smooth the process for all concerned.

Daniel Bellau is a partner and head of corporate at law firm Hamlins.

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