Family Business - A copper-bottomed exit strategy is crucial when selling your business

Mike Kane, Partner wrote for The Scotsman.

Selling your business is as much about timing as anything else. Selling in a rising interest rate market rather than a steady state environment can be more challenging. Equally, you can quickly find yourself on the backfoot if trying to sell up at “retirement age” or when unexpected circumstances such as ill-health appear. Getting the timing wrong can lead to a reduced valuation or a price chip by a canny purchaser. It is worth being prepared.

Some clients start to build a relationship with professionals well in advance of formally engaging them. This is invaluable as good advisers are likely to share nuggets of advice to help optimise a business sale. Typically for a business of any size, a sell-side advisory team will have a corporate finance (CF) advisor, an M&A (corporate) lawyer and a tax adviser as key advisers. After the deal completes you will need private client lawyers and wealth managers.

The CF adviser helps you to define the buyer population and together with your M&A lawyer, you can decide your preferred exit route – whether to the highest bidder via a trade or private equity sale, to a management team via an MBO or an employee ownership trust, the latter often holding significant tax advantages.

A poorly chosen advisory team can cost the earth. Missing key issues to negotiate, overcooking a negotiating point - or worse still, causing a transaction to fall over through lack of experience - are real risks. Ideally, you need an experienced support network to keep a level head when the going gets tough! Each advisor needs to be able to take the time to explain things clearly and advise you properly based on experience, not simply provide options.

The sales process itself can take around 12 weeks from drafting heads of terms to receiving the sales proceeds. During this time, you will be expected to continue to run the business as well as perform a very detailed due diligence process. This includes answering questions about all aspects of your business across contracts, finances, tax, property, compliance and providing clear instructions to your advisers.

The valuation of your business is a complicated exercise and there are many ways of going about it. The most common way for traditional businesses is to apply a multiple to EBITDA (essentially, adjusted profits). For tech companies, instead of a multiple of EBITDA it might be a multiple of revenue or a complex “acqui-hire” where the buyer wants to acquire the technology as well as hire the founder- sometimes the price bears no correlation to potential profit or revenue.

Numerous factors will likely feed into the multiplier. If, for example, the founder owns all key relationships or has all the “know-how”, that may reduce it. Having a strong management team in place should improve the multiplier. Sometimes a stay bonus or share option scheme is deployed to lock in management.

Overall, managing the exit process is like running a marathon. It requires stamina, detailed preparation and a good working relationship with very experienced support to help you reach the end goal you worked so hard for.