Exit Planning

7th October 2016

If you own and run a business that you do not intend to pass on to the ‘next generation’ or liquidate, then, one day, you will have to exit this business. Exit planning is the process by which you plan and prepare for this exit. Hi-tech businesses typically include a strategy on exit as part of their business plan. Good planning should increase your chances of obtaining a trade sale and on the best terms.

We have set up a specialist corporate finance team to offer bespoke services in exit planning, including assisting with:

  • Timing the exit:
    • To fit in with your personal goals (Do not sell the business unless you have definite plans of how you will occupy your time afterwards) .
    • To coincide with when the business results are strong and growing – showing a record (ideally, 3 years) of growing maintainable earnings and profits. Having a three-year business plan in place which includes strong revenue and profit goals, along with corresponding plans to drive and support growth in areas of sales and marketing, product/service delivery and finance. This plan should estimate the size of the market opportunity and have forecasts for growth based on what extra resources or expertise a purchaser could bring to the business.
    • To match market conditions which are fertile for acquisitions.
  • Exit tax planning , including, where relevant:
    • To ensure (consider advance clearance from HMRC ?) entitlement to Substantial Shareholdings Relief, by creating a group structure (if you wish to to recycle the sale proceeds into another business or property venture) .
    • To ensure entitlement to Enterprise Investment Scheme CGT exit tax relief.
    • To ensure entitlement to Entrepreneurs Relief (10% CGT rate).
    • To ensure avoidance of possible De-grouping charges.
    • Making pre-sale employer contributions into your pension.
  • Deciding whether you are selling the business as a self contained company (ie shares) or just the individual business assets (including goodwill).
  • Creating a ‘desirable’ business for a purchaser:
    • Diversifying your customer base, so that no more than 15% of revenue is concentrated with your largest customer.
    • Creating a cash flow positive business model, where customers purchase your product or service more than once per year and pay up-front or as a monthly subscription.
    • De-personalise the business model, so that you do not need to customize products, services or methodologies for individual customers.
    • Creating a business model where you product or service is easily teachable to your staff.
    • Have a clear and unique value proposition.
    • Supplying a product or service which is highly valued by your customers/clients.
    • Once you specialise in something, you can then hire specialist staff.
    • Make something unique about your process, so that you ‘own’ it when pitching.
    • Have best practice contracts/documents in place (employment, sales, leases, statutory meetings).
    • Have a sales team of at least two, to create natural internal competition (these should be people who are good at selling products, not services).
    • Having a scalable business.
    • Shifting your focus to maximising maintainable adjusted EBITDA profit, rather than optimising cash flow. Operationally, this may influence decisions on:
      • Assets: ownership v leasing
      • Staffing projects: consultants v employees
    • Creating a culture which minimises staff turnover.
    • Have a risk register, with considered mitigation plans.
    • Do you have a short and medium term documented business plan (detailing opportunities for growth organically, through margin improvement and through business acquisition)?
  • Considering what cash you want your balance sheet to disclose, to help with pricing negotiations for a no-cash no-debt valuation (pre year end dividends, directors loan repayments or pension contributions could be made)..
  • Structuring the business to operate without you:
    • Establishing strong middle management. Motivate and tie them in with a long-term incentive plan (eg options). Only give away equity now as a last resort. Delegate responsibilities to this management level.
    • Creating financial controls and documented systems/methodologies for post sale, when you are no longer involved. Setting up this structure will involve ‘systemising’ all of the aspects of managing the business, so that, one by one, they do not require your input and creating a long term financial incentive for key individuals to stay with the company.
    • Creating a ‘prospects channel’ where no more than 10% of new revenue is a direct result of your personal sales efforts.
    • The more the business can operate without you, the less likely that part of the sale consideration will be an earn out or deferred consideration.
  • Control over the occurrence and timing of discretionary spends (to maximise EBITDA profits that will be used in valuation)
  • ‘Tidy up’ the business:
    • Formalising existing customer, employment and other trading relationships.
    • Ensure all legal and tax compliance is up to date.
    • Eliminate potential deal-breakers (eg. ongoing litigation).
    • Cessation or splitting of loss making activities.
    • Remove ‘personal’ and ‘mixed’ transactions and assets from the business.
    • Tidy up property occupation, ownerships, etc.
    • Ensure most efficient/saleable structure.
    • As most purchasers will try and structure the deal so as to fund the purchase price out of future ‘target’ profits, the balance sheet should be handed over in a condition that will be conducive to such finance raising.
  • Optimising the ‘Picture’ presented of you on the public record:
    • Submitting full (instead of abbreviated/filleted) accounts, disclosing strong financials, at Companies House, in a timely manner.
    • Improving your business credit rating.
    • Improving the information that can be found on you through simple desktop research (your website, SEO, blogs, etc)
    • Ensuring that your accounts are prepared with accounting policies that are consistent with industry norms.
    • Be visible on other public record mediums, for positive reasons.
  • Preparing a ‘sale pack’, ready for purchaser due diligence.
  • Find an advisor for whom you you will be neither their largest nor their smallest client. Make sure they know your industry.
  • Strategies for attracting approaches from potential purchasers (try and create competition into this process).
  • Creating the sale team and documentation and preparing for a smooth due
    diligence process.

The earlier the grooming process commences, the better and the more robust the company will appear under future due diligence scrutiny. Instruct us to undertake this corporate finance work and you can rest assured that all of the multi facets of this complex area will be taken care of, to your best advantage. Experience, contacts and inside knowledge are the pre-requisites of good corporate finance advice.

Disclaimer - All information in this post was correct at time of writing.

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