Business exit strategies: five ways to sell your company
The decision to sell your business is a big call – and can seem drastic and final, so outlining a vision of how and when to exit will help you with later decisions like choosing the right advisor and pre-sale preparations.
First, start by deciding how much you want to sell to clarify your financial and personal goals.
Full sale – whether you want to retire, feel burned out, or simply want to turn all those years of hard work into cash, a full-sale offers a straightforward clean break, albeit with a transition period attached to minimise disruption and ensure a smooth handover.
Part sale – partial sales are rarer, but useful if you want to be a part of your business’ next growth stage (sell and stay). While most acquirers and investors will want a controlling equity stake, if you are struggling to scale your business to achieve your financial goal, this is a way to de-risk your financial exposure while you wait for another 3-5 years for the enlarged business to be sold outright. However, trying to carve out and sell product lines or underperforming divisions is difficult and needs careful restructuring before approaching the market for buyers.
The top five exit routes
Around three in four of successful business exits are to another company or individual. While it is possible to walk away on ‘day one’, it is far more common for a sizeable portion of the total value due to you to be deferred for a successful transition period.
Although it is unrealistic to expect to dictate price and terms before shaking on a deal, a good advisor will generate a choice of buyers to help you level the playing field.
Private equity investment offers perhaps the most flexible option. Unlike early stage investors (venture capitalists) most PE firms will want a majority stake. The upside is the opportunity to realise the value of your own investment to date, and a recapitalisation of the business allows it to scale more rapidly.
While some investors are hands-off and will leave decisions to you and your leadership team, others will want to implement growth plans and may want you to acquire competitors, enter new markets and expand more rapidly than you are comfortable with.
For businesses worth £1m-plus, m management buyouts will typically be backed by private equity or bank financing. The managers acquire the business assets and become the new owners and may also be required to invest their own funds as well – usually equivalent to a year’s salary for everyone in the MBO team.
MBO transactions are more common in low-growth mature industries where trade acquirers can be harder to find, and if this is the only option on the table, it can be harder to achieve a premium price.
You should always get legal advice before negotiating a management buyout to ensure you get a fair deal.
An asset sale is where you sell some or all your business assets – stock, equipment, customer list – to someone else but you remain the legal owner of the company.
Although less common than a share sale, asset sales are a way to reduce financial exposure to a struggling business in a declining sector or for sellers to boost their cashflow. They tend to complete more quickly as the due diligence process is quicker, the buyer can remove assets which become a sticking point (eg unpaid invoices not likely to materialise). And unlike a share sale, minority shareholders who don’t want to sell can also be forced to accept terms of an asset sale.
The downsides are that contract rights are limited, so agreements with employees and customers may need renegotiating. The overall tax cost can be higher than a share sale, and the seller can end up with significant liabilities (eg building leases).
Selling a business to staff is more commonly deployed to save jobs where the company is at risk of failing, but there are plenty of examples of highly lucrative firms becoming employee-owned – think vegbox supplier Riverford, jam maker Wilkin & Sons, or civil engineering consultancy Arup.
Employee buyouts are typically arranged indirectly through an employee ownership trust (EOT) to make decision-making simpler, but each employee can become an individual shareholder directly – typically if the workforce is very small (eg <10 people).
Philanthropic owners may wish to sell a minority stake to their workforce, and the rest later. This needs careful planning – empowered employee shareholders with voting rights may not want full ownership, while it is much harder to attract an investor or trade buyer to take on a company with a large number of minority shareholders.
Employee buyouts can improve productivity and motivation, while minimising disruption as themanagement structure does not need to change. But it is rarely the most lucrative exit option.
What to do next
Any successful business exit depends on the owners keeping an open mind during a business sale process. You may not think your managers can run your business without you – or fearful that they will do a better job – and you may think all private equity firms behave the same (they don’t).
An early discussion with an independent M&A specialist will help you clarify some preferred routes depending on your personal and financial goals and offer impartial detail on the pros and cons of each exit route.