Selling a business: planning for a profitable exit

Jason Hathaway is managing director and head of the commercial division at Edward Hands and Lewis 

Few business owners or MDs make the development of an exit strategy for their business a priority – but it should be.

Whilst it’s easy to be distracted by the demands of running a company, it is important to ensure that you are thinking long term and planning for the eventual sale of the business years, or even decades ahead. This way you can ensure that you are in control of the process.

And it helps avoid a scenario where you are forced to seek a quick sale and therefore have to settle for a lower price.

Planning for the future

The ideal set-up when you sell a business is the management buyout. Often the simplest route, it is also frequently the most profitable.

However, this doesn’t happen by accident – like most successful business undertakings it has to be planned and worked for. So, if you are hoping for a management buyout somewhere along the line, you need to address certain issues now. 

When, who and how

Firstly, decide when you want sell. This may be many years in the future, but setting a date will give you a time frame to work to.

Selling a business can be tricky, even with careful planning, and it can be difficult to be objective about something that you have spent many years building up

You then need to identify key members of staff who demonstrate the potential and/or desire to be your successor to be trained up. Teach them about marketing the business, give them experience of supervising staff, promote them to managerial positions when available and mentoring them on how to run the business on a daily basis.

You might also want to consider offering share options when they hit targets (which become available after a set period of time) to retain and motivate.

However, all the training in the world is no substitute for the real thing, so you might want to consider remaining a part-time consultant for a set period of time after the sale. Not only will this secure an additional income and ease you into retirement, but it will give your buyers the support of a familiar and experienced mentor to start them off.  

What are the alternatives?

The alternatives to a management buyout are trade sales or an open-market sale, both of which also benefit from long-term planning. As any prospective buyer is unlikely to be familiar with your business, this type of sale involves detailed due diligence.

This process is designed to uncover any issues within the business that might deter the buyer, or which they could use to negotiate down the purchase price. It is therefore vitally important that you have dealt with any outstanding issues and that all your documents are up to date. This includes:

1. Confirming that your lease is up to date and the correct names are on it
2. Checking that the correct employment contracts are in place for your staff
3. Ensuring that you have protected your brand through trademarks (where applicable)
4. Having three years of accounts available
5. Checking that you have no outstanding legal issues. If so, make sure that you have all the information regarding any claims

Protecting your business

Once these issues have been attended to, you are ready to advertise the sale. But again, you need to be wary: some business people use the process of due diligence as a fishing expedition to get information about your business, customers and products - with no intention of buying.

To protect yourself and your business, you should always enter into a Non-Disclosure Agreement (NDA) before commencing negotiations. An NDA prohibits a potential buyer from using or disclosing information about your business.

It also prevents them from contacting your customers. If they breach the clauses contained in the NDA, you would have a claim against them.

Controlling the terms

It is also standard practice to enter into Heads of Terms (HoT). These are used to outline the principal terms of a potential offer for a company.

Within the HoT you can include clauses which require the buyer to provide proof that they actually have the money to buy the business or specifying that the buyer is liable for your legal fees if they pull out of the transaction prior to completion. The HoT also sets out the timescale for the transaction and the offer/consideration for the business so that everyone is working towards the same time frame.

Selling a business can be tricky, even with careful planning, and it can be difficult to be objective about something that you have spent many years building up. So the very best advice is to ensure that you consult a professional who can give you independent advice on what is best for you and your business.