1. INTRODUCTION
Selling your business is generally something that you only do once so it’s important to get it right.
This guide offers a simple, no-nonsense overview of the main things to think about if you’re a shareholder looking to sell a small business* in the UK.
Your motivation for selling will certainly have some bearing on the sale process, particularly ensuring you engage with buyers who can fulfil your objectives. Common reasons to sell include: retirement; pursuing other interests (business or otherwise); you’ve taken it as far as you think you can; or, simply that you’ve had enough and want out. Or perhaps you’d just like to realise some of the value you’ve built up after years of hard work and personal investment in your business.
Many small business owners find that the majority of their wealth is tied up in their business. The idea of extracting some of this value at more favourable capital gains tax rates can be quite appealing, hence the popularity of the partial sale route to a financial investor.
Whatever the motivation, a sale is a complex process and there’s lots to think about. I hope you find this guide useful.
Andrew Stubbs, Founder, High Wood Capital
* for the purpose of this guide we’re focusing on businesses with a likely valuation of between £1m and £25m
2. OUTLINING YOUR OPTIONS
There is a large community of professionals across the country whose day-job is buying and selling businesses and you can learn a lot for free from two or three introductory conversations.
Ask your accountant, solicitor, or bank manager to introduce you to someone who works in M&A (mergers and acquisitions). It’s worth having some high-level business information to hand when you meet (or Zoom), including trading results and an outline of its prospects and opportunities.
The earlier you have these conversations, the more time you have to make any preparations or changes in the business which may enhance your options when you come to sell. Arguably these conversations are also easier and less sensitive before you’ve made any firm decisions to start a sale process. They should still be on a confidential basis.
Some questions you might ask include:
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What’s involved in a sale process?
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Is there an active M&A market in my sector?
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How do we find the best buyer? Who do you think the obvious trade buyers could be for my business?
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Could my business be attractive to financial buyers / private equity?
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What are the pros and cons of trade buyers and private equity? Are there other options?
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Are there any recent market precedents (similar sector / similar size) that could help provide an indicative valuation?
3. SETTING YOUR OBJECTIVES
As a sale process progresses, it’s perfectly reasonable for your objectives to evolve. As you get to know a bit more about potential buyers and the different deal structures, your options start to become clearer.
You may be happy to keep working in the business if Buyer A acquires it, but you’d never work for Buyer B. You may be happy to take some shares as part of the deal with Buyer C, but want upfront cash from Buyer D. Your interest in staying involved in the business could wane completely or you might find renewed enthusiasm (which often happens when the conversations turn to the future plans for the business).
Some key topics to start thinking about include:
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Timing - When do I ideally want to sell and are there milestones to achieve first which could impact timing?
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Life after the sale – Am I comfortable staying involved in the business in the medium-longer term when I might have less control, or do I want as clean an exit as possible?
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Legacy – Whether or not you’re selling the family business with your name above the door, how important is your legacy for your staff, customers and the community?
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Value realisation - Do I want to realise all my value now, or leave some value in the business (or re-invest) and have a second “bite at the cherry”? Does a partial sale, where you retain an investment in a business you know so well, make sense when you compare it to other investment options for your sale proceeds?
4. VALUATION EXPECTATIONS
It is impossible not to think about what your business is worth when you’re considering a sale. The fact remains that it’s only worth what someone is willing to pay for it, at the time you want to sell it.
The trick is obviously finding the buyer that will pay the most, which comes down to preparation, research, presentation, sale strategy, timing and a bit of luck.
Advisers are more likely to initially overestimate value than underestimate value as there’s a natural “sales” element to their role. It’s often informative to drill down and ask why they think their valuation is reasonable. You’ll hear many different approaches to valuation, from the more mathematical to the more subjective and circumstantial.
If you can avoid the temptation to get a number stuck in your head, then that’s great. Otherwise it’s best to treat all indicative valuations with some caution as there are so many factors that can result in wildly different outcomes.
It’s always worth remembering that selling your business is your choice. So if you go through a well-managed sale process and don’t achieve a result you’re happy with, sometimes it’s best to just stop and revisit in year or so. It could simply be down to timing or plain bad luck.
5. CHOOSING YOUR ADVISERS
Preparation genuinely makes all the difference to a sale process, but you need to know what’s involved so the first step is usually getting some experienced help.
There are a few options here.
1. DIY
Usually only for those who have been through the process before and perhaps have lined up a buyer they are happy to deal with. You would bring in a solicitor near the end to document the agreed deal.
2. Brokers
A broker will typically run the marketing process for the sale of your business. They will help produce a standard format, short, anonymous teaser and an information memorandum.
The teaser for your business will likely be sent directly to an agreed list of potential trade buyers and can be posted on business sale websites and distributed on email so it can reach a very wide audience.
Brokers will gather feedback and agree with you who to release more information to, subject to a confidentiality agreement.
They will typically intermediate in negotiations and the due-diligence process, but take a relatively light touch approach compared to a corporate finance adviser. They would usually hand over to your lawyers when heads of terms are agreed.
Brokers generally charge a retainer and a success fee on completion of the sale.
3. Corporate Finance Advisers
A “full service” corporate finance adviser will manage the sale process from start to finish. This includes preparing the business for sale, writing an information memorandum, managing communications with potential buyers, controlling the due-diligence process and management of other advisers (legal & tax etc) right through to completion.
They will work with you on a sale strategy tying into your objectives. They research potential buyers and take a hands-on approach to engaging with them. They will typically take a more targeted approach than brokers, including tailoring the presentation of the business to different buyers, for example to highlight strategic synergies.
There are a broad range of corporate finance advisers from one-man bands to international accountancy firms and investment banks. Generally, more complex larger transactions require bigger firms with more resources. For small businesses, an experienced individual, boutique advisory firm or mid-market accountancy practice is likely to provide an appropriate level of service. Some advisers are specialists in certain sectors but those working with smaller businesses will usually work across sectors.
As with brokers, corporate finance advisers generally charge a retainer and a success fee on completion of the sale. They don’t always cost more than brokers so it’s worth asking for quotes.
4. Legal Adviser
It’s critical you choose a corporate lawyer with relevant experience.
An experienced solicitor may offer more general commercial advice to help you consider and negotiate all the terms of a deal. However they will not usually help with the preparation or presentation of your business, or managing the sale process (bar the legals). If you plan to speak to more than one or two potential buyers you’ll likely need the support of a broker or corporate finance adviser.
Solicitors will typically provide a fixed fee quote.
5. Tax Adviser
Often overlooked until it’s too late, having a tax adviser review the transaction can pay for itself many times over.
There are a few headline tax issues that should be checked early in the process, for example around Entrepreneurs Relief. Sometimes changes may be advised well in advance of the sale process.
Most small business deals will not require much work on tax structuring but getting it wrong can be very costly. There are some specialist transaction tax advisers and many accountancy firms will also have suitable experience in their teams.
It often works to have an initial conversation as soon as you contemplate a sale and then a more formal review when there is an offer and deal structure on the table. Tax advisers will typically provide a fixed fee quote.
In Summary
We think choosing an experienced corporate lawyer and taking tax advice is essential. Whether you choose the DIY route, a broker or a corporate finance adviser is an individual choice dependent on your circumstances. As with tax and legal advisers, you should ideally meet 3 or 4 potential advisers and seek quotes to compare.
6. PREPARING THE BUSINESS
Working with input from your advisers, the next part of the process is usually a thorough review of the company, tidy-up of any issues and preparation of sales materials.
Tidy-up
This may include administrative improvements, for example, developing a high-quality management information pack each month; ensuring all your contracts are up to date and on the latest terms; and making sure you have appropriate regulatory and compliance processes and approvals in place.
Consistent, up to date and comprehensive records will help ensure a smooth due-diligence process. This minimises the risk of buyers finding unexpected issues which they could use to renegotiate the price.
There could also be more fundamental changes you want to make to enhance the business from a potential buyer’s perspective. For example, if there’s a great opportunity in a new area for the business, is there anything you can do now to prove it? Perhaps a short pilot scheme pre-sale so it becomes more than just theoretical?
It’s also important to not gloss over any issues that you can’t fix. Discussing these with your advisers allows them to help develop a strategy to manage or mitigate any issues during a sale process. It’s highly likely that such things are discovered in due-diligence in any event. Being on the front foot can help ensure the process isn’t de-railed.
Sales Materials
The initial sales materials are usually an anonymous teaser and an information memorandum (“IM”) or business overview which your broker or corporate finance adviser will help you put together.
The teaser is typically 1-2 pages of high-level information on the business including trading results and sometimes projections. It’s important that the identity of the business is not obvious as you normally have relatively little control as to where this document could end-up. It should include the key strengths and opportunities for the business.
The IM is usually a 15+ page presentation, succinctly covering key aspects of the business, highlighting points of differentiation and competitive advantage. It will usually include sections on the background; team; customers; suppliers; products and services; the market; growth opportunities; and financial results and forecasts. It’s intended to whet the appetite of potential buyers but should also offer a fair view of the business, as potential buyers may be expected to base initial offers on it.
An often-overlooked point is that a buyer only benefits from the future performance of the business. What the business has achieved to date is only really a guide to the future. It’s worth bearing this in mind when writing the IM and ensuring that the past achievements and performance are used to enhance the credibility of the future opportunities and forecasts. Including your views on the strategic opportunities and how you’d go about tackling them can make for a more interesting and informative presentation of the business.
7. CONFIDENTIALITY ISSUES
Managing confidentiality before and during a sale process is one of the biggest worries for most small business owners. Are my customers going to find out and look elsewhere? Are my staff going to worry about their positions? And are my competitors going to take advantage and use it against us? All justified concerns that need careful management.
Whilst sometimes leaks can be damaging and difficult to deal with, it’s reassuring that they rarely have a material impact on a sale process. But what can you do to manage this issue?
There are a range of parties typically involved in a sale process and each group can be considered separately. The general rule being, only involve people on a need to know basis.
Shareholders
As a minimum, all shareholders that are required to agree to the sale obviously need to know about it at some point. It would be unusual not to involve them at the outset but sometimes there are reasons, perhaps if you have several “behind the scenes” minority shareholders. However, if you take this approach where their agreement is ultimately required, then you risk being held to ransom when you do inform them, especially if at that point you’re heavily invested in the process. There is not usually any good reason why shareholders would leak information about a process, but of course it can happen.
Senior Management
The involvement of your management team depends on the executive roles that the shareholders undertake. It’s going to be challenging to sell a business without involving the Managing Director and Finance Director / Manager as a minimum. However, if the shareholders have access to sufficient information and knowledge about the detailed operations of the business, then they may be able to progress a long way down the road without involving senior management.
Common considerations relating to their involvement include:
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Are they critical to the value of the business? Do you need them presenting the business and will a buyer insist on meeting them during the process?
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Whether to incentivise management based on the outcome of the sale, to help align their interests with the shareholders. This could, for example, be via share options or a bonus?
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Could they lead a management buy-out themselves and if so at what point do you give them the opportunity to put together an offer?
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Are they likely to worry about their job and start looking at other options?
Employment contracts will normally already include confidentiality provisions but sometimes it can be worth bolstering these provisions with a specific confidentiality agreement (sometimes referred to as a non-disclosure agreement, “NDA”).
Advisers
Most advisers will happily sign up to a confidentiality agreement at or before your first meeting with them. Some may ask you to rely upon professional standards and duties or regulations they’re subject to. Your solicitor should be able to help you ensure any potential advisers are covered by suitable confidentiality restrictions.
Customers & Suppliers
Unless they’re potential buyers (see later), then it would be unusual to inform customers or suppliers until the sale has been concluded. There are exceptions of course and your advisers will help you consider the pros and cons in each case.
Sometimes a buyer will insist on talking to your customers or suppliers prior to completing the deal as part of their due-diligence. This may be to check the status of the existing relationship or test whether they would continue the relationship under the proposed new ownership. These investigations are particularly relevant where there are change of control provisions in customer or supplier contracts.
One common solution can be to allow a third-party consultancy firm to interview your customer or supplier under the auspices of market research. The results could then be shared with the potential buyer, avoiding any direct contact.
Potential Buyers
All potential buyers should sign a confidentiality agreement as part of the sale process before any information is shared (other than the anonymous teaser which is intended to ascertain their initial interest).
For trade buyers, confidentiality agreements should be very robust and also include additional provisions, for example to protect against poaching staff, customers or suppliers.
A common concern is that interested trade parties may just be fishing for commercial information. It’s often impossible to know whether interest in buying your business is genuine and it comes down to you and your advisers making a judgement. You may choose to initially share less detailed information or restrict legally who in the buyers organisation is involved in the process, to help protect sensitive commercial information.
Private equity or financial buyers enter into confidentiality agreements as a matter of course and generally have little to gain in leaking information. From their perspective, the less people that know about an acquisition opportunity the better.
8. TRADE OR PRIVATE EQUITY?
Part of your sale strategy is determining which potential buyers to engage with based on your objectives.
They can be broken down into two main types:
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Trade (sometimes referred to as strategic buyers); or
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Private Equity (financial buyers funding partial sales, MBOs & MBIs).
There is usually no reason you shouldn’t approach both types of buyer if they can meet your objectives.
In this section, we highlight some of the considerations to make when choosing who to approach.
However, contrary to what you often read, in our opinion many aspects of a sale process are not really dependent on whether you’re selling to trade or private equity. Factors like the percentage of consideration paid upfront, the level of detail in the due-diligence process and how long the process will take are more dependent on a competitive sale process and an effective advisory team than the category of buyer.
Filtering interested parties into serious buyers who are investing time in the process is an important exercise to minimise disruption to the business. Engaging with potential buyers can be a time-consuming process and the more parties you talk to the more distracting it will be. Day to day operations can suffer as a result. Any dip in trading during the process could be seized upon by a buyer who could use it to renegotiate the price. Equally, holding off important decisions can leave the business vulnerable if the process falls over at any point.
Trade Buyers
You may well know likely trade buyers and your advisers will research the market, both in the UK and internationally, to add further names.
Potential buyers can then be assessed with the strongest candidates short-listed. They can be ranked by their track-record in making acquisitions, financial resources to fund a deal, any strategic synergies with your business and any known acquisition ambitions. In addition, commercial sensitivities with potential buyers need to be discussed at this point. The final list can literally be anything from one or two companies with clear fits, to hundreds of potential buyers.
A trade buyer could be a competitor, supplier, customer, or somebody outside of your industry, perhaps with a common customer base. There are too many different reasons to go into for a company to make an acquisition, but generally there is a strategic rationale that relates to their existing operations.
Key attractions of a trade buyer include:
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Your business might be worth more to them than anyone else. This can help extract a strategic price for your shares i.e. a premium valuation.
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A trade buyer may have a replacement manager to step-in allowing an owner-manager to quickly step away from the business.
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They typically understand the industry better than financial buyers (at least at the outset) so you’re less likely to waste time with parties who lose interest (unless they’re tyre-kickers!).
The typical challenges and concerns with trade buyers include:
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Confidentiality in the market and with sharing sensitive commercial information.
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Senior management may be concerned for their roles which can have a negative impact on trading and morale.
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If acquisitions are not on the Board agenda of the potential buyer, it can be difficult to engage with them, even if there is a compelling strategic rationale.
The fact that many trade buyers will know your industry well can be both a positive and a negative. It may mean they undertake a more focused due-diligence process but concerns around sharing commercially sensitive information can hamper progress.
Private Equity
The private equity (“PE”) proposition is to invest in businesses, not operate them, hence they are categorised as financial buyers / financial investors. PE investors need a management team to run the business whilst they will provide Board level, strategic input.
The most common structure is a management buy-out (“MBO”) where the PE firm provides the capital for your management team to acquire your business. A newly formed company, owned jointly by the PE firm and management team, will be set up to acquire your shares.
They invest in businesses with growth potential over a 3-5 year timeframe and then look to exit and realise a capital gain.
Key attractions of a private equity buyer include:
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Their business is buying businesses and the private equity industry operates across all sectors. There is much less volatility in their appetite for acquisitions than you might find with trade buyers.
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More flexible terms, for example they can facilitate a partial sale allowing you to retain an equity interest in your business.
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Continuity in the business and staff as private equity like to back incumbent management teams and keep up business as usual with customers and suppliers – reducing the risk of disruption or failure.
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Less concern over confidentiality.
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Legacy as an independent business.
The typical challenges and concerns with private equity buyers include:
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PE firms usually need a management team who are either already leading the business or can step-up to the role(s). If they’re not up to it, you will either need to stay involved or they will need to bring in new management. This latter option (a management buy-in or “MBI”) makes the transaction much harder.
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It’ can be more difficult to extract a premium price as valuations may be more formulaic given the lack of synergy or strategic rationale.
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Selling to your management team creates a potential conflict of interest which needs to be managed carefully. The higher the valuation and more money required to fund the deal from the PE firm, the more shares the PE firm will want and less available for management. Experienced advisers will help you manage this conflict and retain control of the process.
PE firms will only complete a deal if they’re comfortable with the relationship dynamics between themselves and key management. This means that at some point in the process, key management need to engage with shortlisted private equity buyers. In reality this means management can have a reasonable degree of influence over the choice of the preferred PE buyer.
The Private Equity Market
There are around 700 PE firms in the UK, but they can be narrowed down quickly into those that are relevant to your business and situation.
Some are sector specialists, most have size £m limits per investment. In addition, each firm generally has defined investment criteria, for example some firms insist on having a majority shareholding in each investment. Your broker or corporate finance adviser should be able to shortlist the most appropriate PE firms.
PE firms are themselves funded from a variety of sources. The larger firms are funded by sovereign wealth funds, insurance companies and pension funds. The smaller funds might include or be entirely funded by high net worth individuals. These parties are generally kept behind the scenes so that the management team only needs to engage with the PE firm itself.
Most mid-market and larger PE firms operate a fund structure, meaning investors commit their capital in advance based on a defined investment policy. In this fund structure the PE firm will assess each transaction against the fund’s investment policy.
High Wood Capital
This is where we fit in. We enable shareholders to realise value from their businesses via management buy-outs (MBOs), retirement sales and cash-out / partial sales. The funding comes from HNW investors on a deal by deal basis to give us maximum flexibility. Small syndicates of investors are matched to each opportunity. We bring a professional approach to small business deals, based on efficiency, responsiveness, pragmatism and integrity.
There are Other Options
Other options to realise value from your business include using an Employee Ownership Trust ("EOT") or listing your business on a stock exchange.
The EOT route is a relatively recent option with some interesting pros and cons, but there are a range of conditions that need to be satisfied.
The selling shareholder can retain a role in the business and the proceeds will be free of capital gains tax. The main drawback being that you're less likely to realise a big upfront lump sum. This is because the consideration is funded out of the resources of your business which would normally mean the consideration is paid in instalments over a number of years out of operating cashflows or borrowings.
It's well worth asking your advisers about the EOT route and whether it could be compatible with your objectives.
For the purposes of this guide we are ignoring a public listing of your business on the AIM market as it is usually only considered a viable exit route for larger businesses.
9. EXECUTING THE DEAL
This phase of selling your business is when it all starts to crystallise. You’ve found a buyer, agreed an outline deal and the challenge is now to deliver it.
The difference between a pure broker and a corporate finance adviser is likely to be clear in this phase. A corporate finance adviser will carefully project-manage the process, managing the legal and due diligence process to a timetable with the objective of completing the deal as quickly as possible. The quicker it’s delivered the less risk of it falling over, less risk of distraction and underperformance in the business and the greater likelihood of the adviser earning a success fee! A broker would typically not get too involved in the due-diligence process, nor the documentation.
As with many things in life, a sale process can be completed very quickly if enough resource is thrown at it (assuming a willing buyer and seller).
However, a “normal” sale process may take 6 months or more from the very start of the process, allowing time to properly prepare, engage with your A-list buyers, create some competitive tension, negotiate the best deal and then deliver it.
The key areas from a seller’s perspective in the execution phase are:
Maintaining Control
Control of the process and timeline are critical to keeping the deal on track and sticking to the agreed terms. If the buyer starts to feel they’re in control and the only option you have, they may start to operate at their own pace which can drag the timetable out, increase distraction and lead to re-negotiation of the commercial terms.
Given it’s hard to run two competing parties right down to the wire, often the only way to manage this is ensure they know you’ll stop the process with them if they don’t meet the agreed milestones. Whether this means actually walking away from the sale process or re-engaging with other interested parties, the threat needs to be seen as genuine to keep control.
Due-Diligence
The buyer will issue a detailed information request which will take time to compile if you’re not already prepared. The information is usually shared via a dataroom, sometimes simply a Dropbox folder. The buyer and their advisers will work through this until they’re satisfied they’ve uncovered all material risks and liabilities and that they fully understand the business and its future prospects. A buyer may have separate third-party advisers covering legal, financial, tax and commercial diligence. On larger deals they might also include IT, insurance, environmental and people / management.
Sale Documentation
Your solicitor will prepare and review a raft of documentation on your behalf, much of which is relatively boilerplate and does not contain key commercial terms. The most important documents for a seller are usually the Sale and Purchase Agreement (“SPA”) and the Disclosure Letter. Amongst other things, these cover the consideration payable, warranties, indemnities and restrictive covenants. If the seller is retaining a role or an ongoing investment (e.g. in a partial sale), then there will also be employment contracts and investment documentation to consider, detailing the terms of the ongoing role and “roll-over” investment.
A corporate finance adviser will work with your legal team to help ensure the agreed terms of the deal are correctly translated into the legal agreements. Tax advisers will typically review the proposed deal and documentation to ensure it’s sensibly structured from a tax perspective and utilises available reliefs such as Entrepreneur’s Relief.
In Summary
Fundamentally most transactions are based on a few common structures and start with template documentation.
However, the sale of a small business is a complex transaction and the documentation will end up being bespoke to each deal.
The nature of the business and the findings from the due-diligence process will work their way into specific legal provisions.
10. COMPLETION
Completion brings together what is often a long stressful project, whether it ends with a sigh of relief or jubilant celebration.
There may be a handover period to work through or it may be the start of a new partnership with a financial investor. Some can’t wait to step away, some find a new lease of enthusiasm for their business.
Each sale process is a unique journey to achieving your business and personal objectives. Whilst sometimes daunting, businesses are bought and sold every day and the process is certainly made easier with an experienced team of advisers around you.
Assuming all goes well, the next and final adviser you speak to could be a wealth manager!