Exit strategies - get in shape for a smart exit

When a home owner is looking to sell their house, you can be sure they will tidy up the property’s garden, freshen up a few walls with paint and generally make sure there are no visible signs of any potential issues.

However, whilst presenting a well maintained house helps to ensure potential buyers aren’t put off at an initial viewing, in order to maximise value and ensure that the property passes diligence (the survey), a diligent home owner should ensure that any ‘cracks’ are fully repaired before placing the home on the market.

The same principles should apply to selling a business but many owners don’t properly prepare their companies for sale.

A purchaser who finds issues in any business during diligence will, in the best case scenario, try to reduce the price or, in the worst case, walk away from the deal.

Therefore, even if it is still several years away it’s never too early to start getting your business in shape for a smart exit.

With this in mind, business owners should give ongoing consideration to the strategic rationale of the exit including:

•   Who would buy the business? By understanding your range of potential acquirers and what it is they might look for in an acquisition, you can build these objectives into your strategic growth plan.
•   Are they buying you? Many businesses are very dependent on their owners or founders and therefore to maximise value, ensure that a strong second tier management team is being groomed as future leaders of the business. This will also give you flexibility in how long you need (or want) to stay on after a deal is completed.
•   What are they buying? Identify the critical value add aspects of your business for a potential acquirer and make them as defensible as possible.
•   What are your stakeholder objectives? Do you have a range of shareholders who may have different objectives or criteria for an exit? Have the shareholders undertaken appropriate personal tax planning?

As well as understanding the strategic aspects of the potential sale, there are certain simple steps that the business can take to ensure it is in the best possible shape for the exit process:

•   Prepare regular budgets and management accounts, demonstrating the reasons behind any variance.
•   All company legal and secretarial documentation (company books, board minutes, resolutions, etc.) should be kept up to date and filed.
•   Ensure all tax documentation is properly recorded and filed.
•   Contracts with key suppliers and customers should be maintained and formalised where needed.
•   Employment contracts and directors’ service contracts should be in place and up to date.

In addition to the above, it can be valuable to instruct a ’vendor due diligence’ exercise, which in most cases will involve engaging a third party to carry out due diligence on your own behalf. This can help identify any issues which can be resolved before marketing and also speed up the diligence process when a sale has been agreed.

There’s clearly no doubt that a strategically planned exit can significantly enhance stakeholder value so it’s essential that any business owner looking to sell their company prepares as comprehensively as possible.

By Andrew Walker, Managing Partner of Johnston Carmichael’s Aberdeen office.