When is the best time to sell your business?
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Most owner-managers of businesses contemplating an exit were laser-focused on the possibility of capital gains tax (CGT) rate rises following Rishi Sunak's budget on 3 March. As a result, many M&A advisers saw a rush of deals trying to close prior to the budget.
Now that we know CGT rates will remain unchanged, for the time being at least, the questions remain for business owners: when is the right time to sell, and what can owners do to maximise their exit valuation?
The truthful answer, regardless of which way the fiscal wind is blowing, is "when you're ready".
Nevertheless, there are important steps owners can take to maximise valuation, and being proactive on this front will help clarify the issue of timing.
While valuation multiples vary depending on the sector – particularly at the moment when the impact of Covid-19 is being felt keenly across leisure and travel industries and Brexit uncertainty continues to affect supply chains and service industries – taking control of your destiny as a business owner is possible in every sector.
We often take calls from clients saying they have just received an unsolicited approach from a potential purchaser and want to know what to do.
Being ready for that approach, or having lined up those potential purchasers in the first place, will help increase your valuation.
How to be exit-ready
For business owners thinking about an exit, there are certain preparations they can make.
These include:
Creating a virtual data room (VDR)
Ideally, the VDR should be created using a paid-for cloud service provider, which will come with the ability to permission, so you can allow multiple bidders to access it and switch off access once a preferred bidder has been selected.
Well-organised data rooms give bidders confidence from the outset and are particularly important while Covid-19 restricts buyers' ability to visit premises and interview staff.
Good (but not cripplingly expensive) VDRs usually have ready-made drop-down folders, enable index-creation and will send updates to potential bidders during the course of the due diligence process. This will save time and money on advisers who will not have to keep logging into the VDR to check whether anything new has been added.
Ensure your VDR contains all your corporate documentation, especially:
Identifying your weak points
Make sure you have thought about how and when to discuss any skeletons in the cupboard. Is there anything you have done incorrectly in the past that you can fix before speaking to potential purchasers?
Share buy-backs that have been carried out incorrectly are likely to require as a minimum specific indemnities and will involve some risk being left with sellers.
It is not unknown for sellers to be required to go back and re-paper share buy-backs, which can be awkward and expensive when you have to do it in a hurry.
Previous employees who sold back shares at a tenth of the present valuation have a habit of resurfacing, even if they have no legal entitlement, and can create mischief and embarrassment. Get this out of the way before you have a purchaser scrutinising your documentation.
Make sure you resolve any shareholder disputes (the same goes for disagreements with customers, suppliers and employees) and get all sellers aligned to minimise your litigation risk, before you start talking to purchasers.
Regulatory requirements
If your business operates in a regulated industry, it may need regulatory authority to trade or sell.
This may create the need for a condition precedent in the sale documentation, so make sure you know the process you need to go through well before you start the sale process.
With many staff still working remotely, regulators are taking longer to respond to applications and queries so sellers should leave plenty of time to obtain required regulatory approvals.
The new National Security and Investment (NSI) Bill, which is intended to prevent assets deemed important to national security from being sold to international buyers, is due to come into force later this year and is likely to have an impact on M&A. While it should only affect certain types of companies (for example, defence-related businesses) it is an added level of scrutiny that could impact all sales.
Sellers therefore need to consider whether they are better to start the process after the bill is enacted.
You also need to consider whether any of your potential buyers will need merger clearance, which for UK businesses post-Brexit will involve dealing with the Competition and Markets Authority (CMA).
Employee incentives
When growing and running a business, it is critical to incentivise your key employees. Achieving a clean exit is much more likely if you have a management team that can run the business without you under new ownership.
If you have ever thought about putting in place equity-based incentives, do so well before you start the sale process. You are much more likely to be able to offer a tax-efficient scheme at a low valuation before you have an offer on the table. Ideally any share based awards should be granted well in advance of when you are considering a sale.
Many sellers start talking about share options only once they are contemplating an exit and any options offered at that point are less likely to incentivise employees in the way the business owner had hoped, and any room for making the awards tax efficient will likely have passed.
Restrictive covenants
If the seller has another business which is competing with the one it wants to sell, they need to think about providing restrictive covenants (non-competes) to the buyer.
W&I
Sellers should be careful to avoid being tied down with warranties that are uncapped as to financial liability or time. Knowing who will provide what level of warranties is critical.
Anecdotally, warranty and indemnity insurance (W&I cover) features in over 50% of exits these days, with that percentage increasing in private equity-backed businesses. The policy will end up being a buyer policy, but sellers can still negotiate about who pays the premium and what level of risk it should cover.
Putting "stapled" W&I cover in the data room along with a seller-friendly SPA as part of the process will help manage the buyer's expectations from the outset and maximise the seller's chances of achieving a clean exit. This will also help differentiate between potential buyers if there is more than one bidder.
Once you are ready to sell your business, the process can take as little as two-to-three months, but in most cases the timeline is closer to 18 months. So with CGT rates currently frozen, now is the time to be thinking about selling.
Deal teams
Finally, it's helpful/necessary to bring together a small inside group of trusted staff who can assist with the DD process and more importantly stand behind any warranties.
Ideally, they should be sellers themselves, as buyers tend to want those giving warranties to have a vested interest in carrying out a thorough exercise.
The vast majority of owner-managers have little if any experience of selling a business, so make sure you have a good advisory team in place well before beginning the sale process.
A good team of lawyers and financial advisers will help get you exit-ready and money spent on good advice will be more than repaid in time and stress saved and potentially costly problems avoided.
This article was authored by Tim Bird, corporate partner at Fieldfisher.
Now that we know CGT rates will remain unchanged, for the time being at least, the questions remain for business owners: when is the right time to sell, and what can owners do to maximise their exit valuation?
The truthful answer, regardless of which way the fiscal wind is blowing, is "when you're ready".
Nevertheless, there are important steps owners can take to maximise valuation, and being proactive on this front will help clarify the issue of timing.
While valuation multiples vary depending on the sector – particularly at the moment when the impact of Covid-19 is being felt keenly across leisure and travel industries and Brexit uncertainty continues to affect supply chains and service industries – taking control of your destiny as a business owner is possible in every sector.
We often take calls from clients saying they have just received an unsolicited approach from a potential purchaser and want to know what to do.
Being ready for that approach, or having lined up those potential purchasers in the first place, will help increase your valuation.
How to be exit-ready
For business owners thinking about an exit, there are certain preparations they can make.
These include:
Creating a virtual data room (VDR)
Ideally, the VDR should be created using a paid-for cloud service provider, which will come with the ability to permission, so you can allow multiple bidders to access it and switch off access once a preferred bidder has been selected.
Well-organised data rooms give bidders confidence from the outset and are particularly important while Covid-19 restricts buyers' ability to visit premises and interview staff.
Good (but not cripplingly expensive) VDRs usually have ready-made drop-down folders, enable index-creation and will send updates to potential bidders during the course of the due diligence process. This will save time and money on advisers who will not have to keep logging into the VDR to check whether anything new has been added.
Ensure your VDR contains all your corporate documentation, especially:
-
Corporate structure, share capital, information on share buy-backs (an area that almost all fast-growth companies get wrong) and share options, constitutional documents and information on restrictions on transfer.
-
Lists of all branches, permanent establishments, subsidiaries etc.
-
Information on any Covid-related loans or grants; furlough payments; disruption to supply chains and negotiations with customers; and insurance policies.
-
Finance, security and solvency – copies of all loan documentation and current financial debt.
-
Contracts – key customers and suppliers, highlighting any that subject to change of control provisions or have onerous terms.
-
Proof of compliance with relevant regulations.
-
Assets including real estate.
-
Employment and pensions – any history of trade unions, works councils etc., key employee contracts, remuneration and length of service (all of which should be anonymised), off-payroll workforce details and evidence of IR35 compliance.
-
Evidence of data protection, privacy and cyber security measures.
-
Intellectual property details.
Identifying your weak points
Make sure you have thought about how and when to discuss any skeletons in the cupboard. Is there anything you have done incorrectly in the past that you can fix before speaking to potential purchasers?
Share buy-backs that have been carried out incorrectly are likely to require as a minimum specific indemnities and will involve some risk being left with sellers.
It is not unknown for sellers to be required to go back and re-paper share buy-backs, which can be awkward and expensive when you have to do it in a hurry.
Previous employees who sold back shares at a tenth of the present valuation have a habit of resurfacing, even if they have no legal entitlement, and can create mischief and embarrassment. Get this out of the way before you have a purchaser scrutinising your documentation.
Make sure you resolve any shareholder disputes (the same goes for disagreements with customers, suppliers and employees) and get all sellers aligned to minimise your litigation risk, before you start talking to purchasers.
Regulatory requirements
If your business operates in a regulated industry, it may need regulatory authority to trade or sell.
This may create the need for a condition precedent in the sale documentation, so make sure you know the process you need to go through well before you start the sale process.
With many staff still working remotely, regulators are taking longer to respond to applications and queries so sellers should leave plenty of time to obtain required regulatory approvals.
The new National Security and Investment (NSI) Bill, which is intended to prevent assets deemed important to national security from being sold to international buyers, is due to come into force later this year and is likely to have an impact on M&A. While it should only affect certain types of companies (for example, defence-related businesses) it is an added level of scrutiny that could impact all sales.
Sellers therefore need to consider whether they are better to start the process after the bill is enacted.
You also need to consider whether any of your potential buyers will need merger clearance, which for UK businesses post-Brexit will involve dealing with the Competition and Markets Authority (CMA).
Employee incentives
When growing and running a business, it is critical to incentivise your key employees. Achieving a clean exit is much more likely if you have a management team that can run the business without you under new ownership.
If you have ever thought about putting in place equity-based incentives, do so well before you start the sale process. You are much more likely to be able to offer a tax-efficient scheme at a low valuation before you have an offer on the table. Ideally any share based awards should be granted well in advance of when you are considering a sale.
Many sellers start talking about share options only once they are contemplating an exit and any options offered at that point are less likely to incentivise employees in the way the business owner had hoped, and any room for making the awards tax efficient will likely have passed.
Restrictive covenants
If the seller has another business which is competing with the one it wants to sell, they need to think about providing restrictive covenants (non-competes) to the buyer.
W&I
Sellers should be careful to avoid being tied down with warranties that are uncapped as to financial liability or time. Knowing who will provide what level of warranties is critical.
Anecdotally, warranty and indemnity insurance (W&I cover) features in over 50% of exits these days, with that percentage increasing in private equity-backed businesses. The policy will end up being a buyer policy, but sellers can still negotiate about who pays the premium and what level of risk it should cover.
Putting "stapled" W&I cover in the data room along with a seller-friendly SPA as part of the process will help manage the buyer's expectations from the outset and maximise the seller's chances of achieving a clean exit. This will also help differentiate between potential buyers if there is more than one bidder.
Once you are ready to sell your business, the process can take as little as two-to-three months, but in most cases the timeline is closer to 18 months. So with CGT rates currently frozen, now is the time to be thinking about selling.
Deal teams
Finally, it's helpful/necessary to bring together a small inside group of trusted staff who can assist with the DD process and more importantly stand behind any warranties.
Ideally, they should be sellers themselves, as buyers tend to want those giving warranties to have a vested interest in carrying out a thorough exercise.
The vast majority of owner-managers have little if any experience of selling a business, so make sure you have a good advisory team in place well before beginning the sale process.
A good team of lawyers and financial advisers will help get you exit-ready and money spent on good advice will be more than repaid in time and stress saved and potentially costly problems avoided.
This article was authored by Tim Bird, corporate partner at Fieldfisher.
