Exiting a Business: Tips for Entrepreneurs

In this article Neil Nichols, Founder of Accounts and Legal discusses how business owners and entrepreneurs can prepare their business so that it's ready for sale. In 2021, alongside his brother Robert Nichols, Neil sold Portico, the company they'd built together. Since then, he's helped countless business owners sell their business, here, he shares his tips. 

Start Planning for Your Business Exit Early 

Exiting a business is one of the most significant decisions an entrepreneur can make. Whether you’re planning to sell to a larger company, bring in private equity investors, or transition to an employee ownership trust, careful preparation is essential. A successful exit requires years of planning, strategic decision-making, and meticulous attention to detail. Here’s a comprehensive guide to help you prepare for a seamless and profitable exit. One of the most critical factors in a successful exit is starting the process early. Ideally, you should begin planning three to five years in advance. This timeline gives you the flexibility to make strategic adjustments and build a business that’s attractive to potential buyers. Here are some key steps:

1. Create a Five-Year Plan: A five-year plan should outline your ambitions for growth, profitability, and operational improvements. This plan should be based on the opportunities that you’ve identified and be quantified in terms of measurable targets like number of customers, spend per customer and target margins.
2. Reduce Dependency on Key Individuals: Buyers are wary of businesses that rely too heavily on a single person, especially the founder. To mitigate this risk, you’ll need to beef up the management team, so your business can operate independently of you or any other key individual.
3. Strike a balance between profit and growth: Early on in your plan, it makes sense to prioritise growth over profit, because a bigger business can normally achieve higher levels of profit by diluting its fixed costs. However, in the years leading up to exit, a purchaser will want to see both profit and top line growth, so don’t leave the profit part too late!

Time Your Exit

Timing is everything when it comes to selling a business. Exiting at the right moment can significantly impact the valuation and attractiveness of your business. Consider the following factors:

1. Analyse Market and Competitive Landscape: Keep a close eye on market conditions, and your competitors. If the market you operate in is growing, it is far easier to grow your own P+L; equally, if the market is shrinking, it is very difficult to achieve good growth even if you are one of the best operators in your sector. Watch out too for waves of consolidation, with larger competitors buying up smaller ones; these things go in cycles and can be very helpful in a sale process.
2. Consider Regulatory and Political Changes: Regulatory or political shifts can affect your business’s value and attractiveness. Some changes in regulation (like minimum wage and employer’s national insurance) affect all businesses, but the impact of these rules are not felt equally. Watch out too for sector-specific policies that can make or break businesses, and time your exit accordingly to take advantage or avoid these issues.
3. Monitor Fiscal Changes: Taxes in general, but specifically capital gains tax and schemes like Entrepreneurs relief, are often a factor in an entrepreneur’s decision to sell. However, a wave of exits in any one sector can result in an oversupply of businesses for sale, and suppress exit valuations.

 

Make Your Business as Desirable as Possible

To attract buyers, being unique and differentiated from the rest of your market and competitors is helpful. This is particularly important for niche players who don’t have large-scale operations on their side:

1. Develop a Unique and Defensible Proposition: Ensure your business offers something unique that differentiates it from competitors. This could be a proprietary product, a loyal customer base, or a strong brand reputation.
2. Demonstrate Growth in Profits: Growth in profitability is ultimately the single biggest factor in achieving a good exit, so it is important to make sure that your profit is growing in both absolute and relative terms.
3. Reach a Decent Size: Larger businesses often command higher valuations because they are easier to finance and have lower perceived reduced risk. Unlike lots of things in life, the more expensive the business, the easier it is to sell!
4. Consider Synergies: Think about who might buy your business and what synergies they might achieve. Making sure that you have some flexibility in your cost structure (like flexible lease terms), can translate into immediate profit for a potential buyer.

 

Think About Who You Will Sell To

Understanding your potential buyers is crucial for designing your exit strategy. Different types of buyers have different priorities and expectations. Consider the following options:

1. Trade Sale to a Larger Player: Selling to a larger company in your industry can offer synergies and opportunities for growth. These buyers are often interested in acquiring market share or complementary products.
2. Consolidators: These buyers are focused on rolling up smaller companies to create a larger, more competitive entity. They’re often interested in streamlining operations and achieving economies of scale.
3. Venture Capital or Private Equity: Private equity firms and venture capitalists are interested in businesses with strong growth potential. They’ll typically invest with the goal of scaling the business further before exiting themselves, but to be attractive to this type of investor, businesses need to be achieving bottom line growth of 15 – 20% per annum.
4. Employee Ownership Trust (EOT): Transitioning to an employee ownership model can be an attractive option if you want to reward your team and ensure the business’s legacy. It works well for lower growth businesses, or where there is not a ready market of potential buyers. It can also be more tax efficient than a normal sale.

Get Ready for the Due Diligence Process

Due diligence is a key part of the sale process and is used by buyers to check that they know what they are taking on. Typically, the buyer will request a broad range of information, and then follow up with specific additional questions. It is important for the seller to be ready for this and do this in advance, thinking through what’s likely to be asked and how you present this information to make sure that you present a full picture, without giving the purchaser the opportunity to decrease the price over the course of the negotiations. This is the sort of thing you should have ready to go:

1. Share Certificates: Ensure all share certificates are accurate and up to date.
2. Insurance Claims History: Provide a comprehensive record of any insurance claims, demonstrating transparency and reliability.
3. Complaints and Litigation: Be prepared to disclose and explain any complaints or legal disputes. Buyers need assurance that there are no unresolved issues that could impact the business.
4. Contracts: Organize all contracts with customers, suppliers, and partners. Buyers will want to review these agreements to understand the business’s obligations and relationships.
5. Policies: Ensure all company policies, including HR and operational policies, are well-documented and compliant with regulations.
6. Employee Issues: Address any employee-related concerns, such as unresolved disputes or unclear terms of employment. A stable workforce is a significant asset.

Think About Life After Exiting Your Business

Exiting your business is not just a financial transaction; it’s a life-changing event. But before you picture yourself on a Caribbean beach for decades to come, consider the following aspects to ensure a smooth transition:

1. Restrictive Covenants: Be aware of any restrictive covenants in the sale agreement. These clauses may limit your ability to start a similar business or compete with the buyer, and if life on the beach loses its appeal, you don’t want to be in a position where your entrepreneurial wings are clipped.
2. Non-Compete Agreements: Similarly, non-compete agreements can curtail what you can do post completion. Sellers normally ask for far more protection here than the really need, so it is important to make sure these are reasonable and aligned with your future plans.
3. Post-Exit Plans: Reflect on what you want to do after exiting the business. Whether it’s starting a new venture, investing, or retiring, making sure you leave your options open is really important.

Conclusion

So to conclude, planning your exit should start several years before you intend to sell. At the very least, having a 5-year plan will keep you organised and motivated. We offer exit planning as part of our quarterly review process, and can help create a really good financial model, with targets and KPIs to keep you on track. And when the time comes, we are one of the only firms in the UK with solicitors and accounts under one roof, meaning that we’re uniquely positioned to help you achieve the best possible exit. Drop me a line if you’d like to discuss any of this.