Table of Contents
In Short
- Start preparing your exit strategy well before you intend to sell to maximise your business’ value and reduce risks.
- Choose between an asset sale or share sale based on your goals, buyer preferences, and tax considerations.
- Organise your financials, legal documents, and contracts to avoid delays or issues during the due diligence process.
Tips for Businesses
Plan your business exit as carefully as you planned your growth. Keep your financial records clean, resolve legal issues early, and seek advice from trusted advisors. A well-prepared business is more attractive to buyers and helps you achieve a smoother and more profitable sale.
Most business owners think that planning a business exit strategy might seem premature. After all, you are probably busy growing your business and not considering leaving it behind, especially if you are in the growth phase of your company. However, having a well-thought-out exit plan is crucial for protecting your interests and maximising the value of your business. This article examines the key considerations to address when developing your exit strategy.
Why You Need an Exit Strategy
An exit strategy serves as your roadmap for eventually transitioning out of your business. Business owners may need to exit for various reasons, including retirement, new opportunities, or simply wanting to realise the value they have created. Whatever the reason is, a well-planned exit strategy helps you:
- maximise your business’ value;
- reduce tax implications;
- ensure business continuity;
- protect your employees and stakeholders; and
- achieve your personal and financial goals.
Timing Your Exit
Successfully timing your exit requires careful consideration of both market conditions and your business’ performance.
Continue reading this article below the formMarket Conditions
Market timing can significantly impact your business valuation. Economic cycles, industry trends, and buyer appetite all influence what purchasers are willing to pay.
- current market trends in your industry;
- competitor activities and any trends in their behaviour;
- availability of financing for potential buyers; and
- regulatory changes that might affect your industry.;
Exit Options
Different exit strategies will suit different circumstances and objectives.
Asset Sale
In an asset sale, you sell all the business’ assets (such as equipment, inventory, and customer contracts) but retain the company’s shell. This means you are not passing on any hidden debts or legal problems to the buyer. It is often cleaner and safer for the buyer, but the tax treatment can be more complex.
However, you will still need to consider other factors, such as maintaining confidentiality during negotiations and addressing employee concerns. If you have employees, they are typically transferred to the buyer upon completion, in accordance with employment laws. It is a good idea to consult with an employment lawyer who can advise you on whether the relevant laws apply and whether the employees will be eligible for transfer. Failure to comply with these laws can lead to potential claims from employees.
Share Sale
On the other hand, you might decide that you want to sell the entire company, not just certain assets. The buyer assumes responsibility for everything in this arrangement – the good and the bad. This involves selling all the company’s shares. Because of this, the buyer will want to conduct due diligence on the company to perform thorough checks, as they are taking on all debts and liabilities.
Buyers often have their own preferences over how they would like to purchase a business. Individual buyers purchasing their first business usually prefer asset purchases because they can pick and choose what they are taking on. Corporate buyers or competitors might prefer share purchases because they want everything, including the company’s trading history and relationships.
What Buyers Look For
Regardless of whether you are selling assets or shares, buyers will want to thoroughly examine your business before completing the purchase. This process, known as due diligence, involves them reviewing your financial records, contracts, legal compliance, and other key documents.
For asset sales, buyers focus heavily on the specific assets they are purchasing. They will want detailed lists of equipment, inventory levels, and customer or supplier contracts. They will also examine which liabilities, if any, they may be assuming as part of the asset purchase.
Common issues that can derail transactions include poor financial records, undisclosed liabilities, key customer contracts that cannot be transferred, employment disputes, or regulatory compliance problems. Preparing these areas well in advance of any sale discussions can significantly improve your chances of completing a successful transaction.
Preparing Your Business for Exit
Preparing your business for sale requires months of meticulous preparation to achieve the best possible outcome.
Getting Your Finances in Order
Buyers will scrutinise your financial records thoroughly, so start by ensuring your bookkeeping is accurate and up-to-date.
If you have been mixing personal and business expenses or keeping casual records, clean this up now.
Address any outstanding tax issues or HMRC queries before they become deal-breakers that could delay or derail your sale.
Legal Housekeeping
Review all contracts to ensure they are current and transferable to new owners.
Protect your intellectual property by registering trademarks or patents where appropriate, and address any outstanding disputes promptly before they escalate into expensive problems.
Resolve any ongoing legal or regulatory issues that could concern buyers, including employment disputes, health and safety concerns, or compliance problems. It is better to handle these matters yourself rather than giving buyers reasons to reduce their offers.
Organising Your Documents
Having everything organised in advance makes the sales process smoother and demonstrates professionalism on your end. Keep your corporate documents up to date, including company registers and filings with Companies House. Organise your commercial agreements into accessible files, including customer contracts, supplier agreements, employment contracts, and property leases.
Selling your business involves a number of moving parts. This fact sheet will provide an overview of the sale of business process and
the documents you need to make an effective sale.
Key Takeaways
The businesses that achieve the best sales outcomes address potential issues early and work with experienced advisors throughout the process. Market conditions and circumstances can change, but remaining prepared for a potential exit in the future will make saying goodbye to your business much easier.
If you need help with your exit strategy, our experienced business sale and purchase lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to solicitors to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Business valuations depend on factors such as your industry, financial performance, growth prospects, and market conditions. Professional valuers examine profit levels, cash flow, assets, and recent sales of similar businesses to determine their value. A professional valuation provides a realistic starting point for discussions about the sale.
Timing is critical. Announcing intentions too early can create uncertainty and affect performance. Most owners wait until they have serious buyer interest before making announcements. When communicating, be transparent about the process and its implications for job security. Consult an employment lawyer if you are unsure about how to approach the situation.
Simple sales may be completed in three to six months, while complex transactions can take 12 months or longer. Factors affecting timing include thoroughness of preparation, buyer financing, regulatory approvals, and legal complexity. Early preparation gives you the best chance of completing within your preferred timeframe.
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