How to sell your small business when you want to retire
The key to a stress-free succession planning is to think ahead, says Keith McAlister of Thomson Snell & Passmore.
Research by BDO has revealed that 15pc of SME business directors are aged over 66 and 10pc are over 70. In addition, research has shown that 113,000 directors over the UK retirement age of 66 are still running their businesses, including some who fail to sell their small business before their planned retirement.
With the sale of a business taking on average nine months, this research reinforces the importance of planning ahead. So, how can you plan for retirement, sell your small business and enjoy a stress-free exit?
Preparing to sell your business
For those who have never sold a business before, the exit process can be daunting and preparations can be easily pushed aside, with business owners instead choosing to focus on day-to-day operations.
However, planning should be considered as early as possible. Time provides the opportunity to think about what the exit might look like and who the right buyer might be. If a pro-active approach is taken and a good succession plan is in place early, it will usually be rewarded in terms of a smooth sale process and a better deal for the seller.
Have the right team in place
To make a sale more attractive, the right people should be in place both internally and externally. Internally, if the company is solely reliant on the business owner it will not be very attractive to a potential buyer. Therefore, business owners should ensure that the company will continue to run effectively despite their exit. This may involve putting in place an entire management team that survives the owner’s exit or key people in certain positions.
This may, deliberately or otherwise, also open up the possibility of a management buyout which can be a significantly easier exit than searching for a third-party buyer.
The succession plan should be clear about whom (if anyone) will succeed in the role and whether the role could be delegated to others in the company. If it becomes clear that the company does not have the right people or skills, then the gaps should be filled as soon as possible.
Find professional advisers
Externally, a year or two ahead of the exit itself, a prospective seller should seek advice from various professional advisers. Professional advisers will be able to help undertake a review of the business to assess whether a sale is feasible. Part of the review process is to highlight areas of the business which might prevent a sale or prove unattractive to a potential buyer. Remedial action can then be taken pre-sale, and this will ensure that the business is in the best possible shape before being marketed.
Advice should be sought from:
- A tax adviser, who will be able to highlight any personal and corporate tax issues ahead of a sale.
- Accountants, who can ensure that the finances and accounts of the company are healthy. This will make the company more marketable and more valuable to prospective buyers.
- A business consultant will be able to provide advice in relation to a business strategy and ensure that it is implemented up to the point when you sell your small business.
- Solicitors, who will ultimately be responsible for the sale transaction documentation. In addition, solicitors will be able to give advice in relation to any legal issues which might arise during the due diligence process. For example, they can sort out contracts, assist in resolving any disputes and tidy up the corporate structure ahead of the sale.
- A corporate finance adviser, who can market a sale and negotiate the terms of the exit.
Formulate a sales strategy
Once the above has been finalised, the next step is to formulate a sale strategy.The key elements being:
- The method of sale, whether by private sale to a trade buyer or a private equity investor, flotation, auction or a management buy-out (MBO).
- The vast majority of sales are by way of private sale. If a competitor emerges as the most likely buyer, you will need to ensure you have robust legal documents regarding confidentiality and the use of any information disclosed as part of the due diligence process.
- The structure of the sale i.e. sale of shares or sale of assets.
- A “share sale” is where all of the assets, liabilities and obligations are acquired by the buyer. The buyer will acquire the shares and the company will continue to operate as before. The owners of the company will change. This is usually more tax advantageous for a seller than an asset sale.
- An “asset sale” is where only specific assets are obligations are acquired by the buyer, although in practice the purchaser is likely to require all or substantially all of the business and assets be sold. This is legally more attractive to a buyer as they can ascertain better precisely what is acquired.
- The timing of the sale. This is an important consideration for the seller to maximise the benefits and to improve the attractiveness of the company. From a trading perspective, a company that is on an upward growth trajectory but with potential to increase its turnover will always be the most attractive to buyers.
- Once a buyer has been identified and the sale structure agreed, negotiations will commence on the key terms of the sale.
What is an earn-out?
Earn-outs, whereby the sale price is determined by the future performance of the business, are increasingly common. A seller/director may be required to remain in situ for the period of the earn-out or may want to in order to ensure the business hits the targets required by the terms of the earn-out. This can be challenging to a seller who has relinquished control and requires careful drafting in the legal documentation.
To summarise, succession planning is vital for the future stability of any business and a well-managed and documented succession plan will make any transition straightforward. The key to a stress-free exit is to plan ahead.
Article first published in Growth Business. Read the full article growthbusiness.co.uk/how-to-sell-your-small-business-when-you-want-to-retire