I want to sell my business but don’t know who to sell to
Lee Humble, Associate Partner at MHA Tait Walker talks through the options for selling a business.
Selling your business is a big step, with the time, expense and uncertainty of such a process often a deterrent for shareholders. In the current market however, there are increasing numbers of ownership teams considering their longer-term goals, both corporate and personal, and for some it is becoming attractive to explore a disposal, whether that be in full or in part. COVID-19 is an obvious factor behind this, as well as the implications of tax changes which could arrive in the Spring 2021 Budget. For those in this category the question therefore arises: who do I sell my business to?
Who do I sell my business to?
The most obvious option would be to sell to an existing counterparty who either trades directly in the markets you trade in, or complimentary markets to those you operate in. The audience of buyers in this situation may include direct competitors who wish to eliminate a rival and / or steal greater market share, or those who want to penetrate your market either because they don’t serve it already due to a lack of geographical presence or access to the necessary skills, expertise, supply chain or customer base. An exit under this route can often yield strong returns where a strategic buyer is found, i.e. one who wants your business for a particular reason and will therefore pay a handsome price for it, albeit the balance will be the exposure of confidential information which may disrupt the business marketed for sale.
A sale to Private Equity investors
Another option, and one which is becoming increasingly common for businesses with scalability potential, would be a sale to Private Equity investors. Financial investors of this sort have the benefit of being able to buy varying stakes in your business which may allow the business owner to realise some value whilst also remaining in the business, and the private equity buyer may also bring their own skills, experience and contacts into play which will help drive future business growth. Deal statistics also reveal that PE buyers often buy at a price which can sit at around a 20% premium to their trade counterparts, albeit the devil remains in the detail with these buyers often investing via a combination of debt and equity which will impact future returns and split of proceeds, and crucially as a financial investor they will manage the business very closely to ensure their growth in returns is delivered.
A sale to Management
As an alternative, a sale to management may also present as an option for those businesses with a strong layer of middle management. MBOs are often executed at a sales value slightly beneath that which would be expected in a trade sale albeit the owners may benefit from additional control over the sales process and will have greater visibility over the process at all stages. The biggest hurdle in an MBO will be finance availability- with external capital (often including private equity finance) needed to deliver the transaction, with the alternative being that the vendors finance the deal by deferring the realisation of their proceeds.
A sale to Employees
Another option, and one which can often work well for businesses operating in professional services / consultancy, would be a sale to employees under an Employee Ownership Trust (“EOT”). The requirements for EOT’s are set out in legislation and the use of such a mechanism is not appropriate for all businesses (and several qualification hurdles must be satisfied) but the key benefit for departing shareholders can be that such a sale can in theory be carried out without any CGT arising at all.
Fundamental to any route is the business owner’s agreement on a fair and deliverable valuation and ensuring that all records (financial and otherwise) are in place and up to date. A disposal process is a true lifetime event and one which careful planning, complimented by professional advice is always recommended.
Lee Humble is an Associate Partner at MHA Tait Walker Corporate Finance and has 15 years of professional services, banking sector and Corporate Finance experience, having spent time in London and the North West.
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