M&A

Business owners are in a “precarious position” when it comes to setting up effective exit strategies and succession planning.

Recent research from wealth manager Charles Stanley found almost half of businesses do not have an exit plan in place, while more than one in 10 have not even considered the need for one.

Dropjaw Ventures founder Roy Shelton is an expert in supporting entrepreneurs planning their business exit. He says exiting is a key step, and can be an “incredibly stressful and daunting experience for all involved”. 

So how can you massively improve your chances of success? First of all, by focusing on the right type of exit.

“If you want a partial exit then it’s best to de-risk your position with a minority share sale to private equity,” he says. “This allows you to continue to run a business and also then generate cash for your personal life – for example, paying off the mortgage; funding kids’ university fees or getting them on the housing ladder; buying a holiday home; or having money for a rainy day.

“If someone wants out fully then a trade sale is a more likely option. This way the person exiting is fully free from the day-to-day running of the business – following any potential handover or earn-out period – and can pursue other activities which might be a new business venture or retirement.

“The final type is typically a management buyout, whereby the principal shareholders allow their management teams to buy up their shares and take over the running of the business. Owners can exit fully or move to a non-exec position as this allows them to maintain some input and guidance, keeping an eye on things to mitigate any risk around receiving the deferred consideration.”

Trade sale

Trade sales typically are the preferred option if owners or shareholders wish to generate a cash consideration for their shares. 

“There are tax implications such as capital gains which need to be considered: having a good tax advisor onboard for the transaction should minimise that exposure,” says Shelton.

“The process can entail trying to sell the company off market, whereby the owners approach known contacts within their industry – typically a competitor or partner – to ascertain their interest and then run a process from there. 

“This is fraught with risk, due to the inexperience of selling a business and the emotional connection sellers often have to their business. Quite often this will not maximise the exit valuation and the process will take longer. 

“It is also distracting for the sellers and their core business will typically suffer given the focus of the exit. 

“The more favourable way is to appoint an advisor who is experienced in packaging and selling companies: they typically have a black book of buyers and can be more selective at running the process and can also remove the emotional state of mind, therefore managing the process more efficiently and maximising the value whilst allowing the seller to  focus on running their business.”

Private equity sale

On a private equity sale, he advises: “Private equity buyers tend to have deep pockets and if they see the opportunity of synergy with other companies within their portfolio then they could pay a premium. 

“You would almost certainly appoint an advisor to manage the discussions and the process as you would be dealing with professional investors so structuring the deal as a ‘win-win’ is vital.”

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So how can business owners make their company more attractive to buyers?

“There are a whole range of metrics that buyers look at. If a seller knows that they are going to exit, plan well in advance – 12-24 months – and track the following:

  • That monthly recurring revenue is +70% of total revenue 
  • Show growth and recurring customers and how they ramp up
  • Illustrate customer churn – ideally not more than 10% a year
  • Average aged debtor/creditor days trending – ideally <45 days
  • Ensure no one customer is +10% of the entire company revenue stream
  • Ensure EBITDA is growing YOY and is a minimum of 15%
  • Demonstrate strong management teams with solid internal processes, governance and controls
  • Sticky contracted customers

Due diligence

Shelton says any due diligence process can be time-consuming and extremely detail-oriented.

“Expect a detailed review of current, future and historical trends in your data across finance, customer services, HR, sales/marketing, legal (IP/ licensing)  governance and controls. 

“A scan of the competitive landscape is also likely. Interviews with senior and middle management and also referencing with key customers, suppliers and partners will be included.

“It is vital to have an advisor manage this process as it’s very distracting for the seller and the buyer wants to perform detailed DD as swiftly, accurately and cost effectively as possible so setting up a formal data room is key.”

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If you sell your business, what will the deal look like?

“Exits all depend on what the seller is looking for and prepared to accept, and what the seller is prepared to close out at. Deals range from 100% cash out on day 1 (rare) to share swaps and or anything in between. 

“It is vital that any buyer and seller be honest from the initial discussion as to what they are trying to achieve so both can understand and agree.”

What other processes should business owners be aware of?

“Whilst buying and selling a company is common and there is a proven path to follow, I am always conscious of a buyer looking to chip the seller at the last minute on the price,” warns Shelton. 

“If the seller smells blood – death, debt or divorce – then they may look to drive the price down at the last minute. Also be prepared to be chipped if anything is uncovered during the due diligence process that the buyer feels will or could create additional risk in the deal.

“Internal and external communications are vital for the sanity of employees, partners and customers to ensure they understand what the transaction means to them. You don’t want them to be spooked.”

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