27 April, 2021
Despite economic headwinds, corporate and private equity investors have unprecedented access to capital for potential deals. As valuations increase, sellers are expected to be more rigorous and unwanted surprises in a deal are more costly. Sellers need to give confidence to buyers to move transactions toward a successful conclusion. Proactive preparation has become mandatory. Processes have accelerated and become more data-driven. Quality of earnings analysis and sell-side due diligence are becoming commonplace.
It is important to identify the business and personal goals and objectives, both monetary and non monetary, of selling your business. To a large extent, these considerations determine the right exit strategy. Being proactive at the outset empowers you to assert more control when the time is right. It also enhances the eventual value of the business to buyers.
The process of identifying objectives will help you determine the right exit strategy. Objectives will be both financial (liquidity, valuation, tax/estate planning) and non-financial (succession, employee and other stakeholder concerns, and family dynamics.)
It is important to see the business through the eyes of potential buyers. Are you going to manage a continuing role in the business? What are their expectations about control? Can you determine the appropriate transaction structure and reconcile both the buyer and seller objectives?
One of the smartest moves you can make to sharpen your selling story is to look at your business through the eyes of a buyer. We believe the earlier you step away from the day-to-day and study the business anew, the more time you have to make substantive changes that add to the value
of the business. The goal is to immerse you in the buyer’s world so that they don’t all look the same to you. The variations in where buyers find value in your business and their operating philosophies after closing the deal) may not loom large to you at the moment, but they could play out in ways that leave you with very different options when it comes to exiting the business.
Among the actions required when preparing your business to be sold are:
You’ve made the decision to sell. You’ve considered the possible types of buyers and the type of sale that will work well for your business. You’ve considered the value of the business and geared up for an actual sale process, building a package to present to potential buyers. Now you’re ready to approach potential buyers and begin the actual sale process.
How are you going to preserve and transfer the wealth generated by the exit from your business? There are estate and tax planning considerations. It’s important to recognise that managing wealth well is not too dissimilar to running a business. You have alternatives to preserve wealth for a long time and to ensure it flows where you want it to in the most tax-efficient manner as possible.
Once the decision has been made to sell, the business switches to a faster gear, you need to remain focused. If attention to the day-to-day operational matters gets pushed aside, the business will likely suffer just when optimal performance is critical. At the same time, you’ll need to step aside and think through everything that the sales process will impact, from other shareholders and employees to lenders, suppliers, customers and competitors (who may become a buyer).
Demonstrate the depth of management and deal capabilities to move to a close. For owners, the art lies in forming the optimal internal team. The right people must be identified to gather information and interact with buyers. At the same time, the group must be narrow enough to control the consistency of the seller’s message and minimise overall distraction from day-to-day operations.
Unpleasant surprises can quickly derail buyer- seller momentum and deflate perceptions of worth. Comprehensive sell-side due diligence will take much of the mystery out of valuation exercises. It should reflect considerations of the key drivers of the business from both the seller’s and buyer’s perspectives. The process helps identify areas that have deal and value implications and prepares and coaches management to address the issues with potential buyers. Concise, knowledgeable responses are required to answer fundamental buyer questions; anything less can detract from value and from the overall transaction’s likelihood of success.
Transactional value depends to a great degree on who’s doing the purchasing: buyers interested in potential synergies and cost savings or private equity sources seeking an anchor investment and focused on optimising the financing structure and putting their capital resources to work. By better understanding a buyer’s philosophy and attitude toward value, a seller can begin to understand how this outlook applies to the attributes of the business and its emerging valuation. An external market perspective also prepares owners to present the most credible and most compelling picture of future growth and profitability.
Entrepreneurs / business owners typically prefer to sell shares in the trading company and incur only one level of tax. There are a number of tax reliefs available for personal shareholders in such instances to help reduce the effective tax rate where certain conditions are met (e.g. entrepreneurs relief / retirement relief).Alternatively, the establishment of a personal holding company pre-sale is often seen as an attractive option for individuals to divest all or part of their business. Exiting through a personal holding company can be efficient from a tax perspective whereby certain conditions are satisfied to avail of an exemption from tax at the level of the personal holding company divesting of the shares.
Whatever path you may be considering, we hope this is a useful starting point for the conversations you will have with your stakeholders, trusted employees and family, as well as your advisers as you seek to realise the value you’ve worked hard to create. We are ready to help you as you face this exciting future. Contact us today.