Anyone who has built a successful business from scratch should feel justifiably proud of their achievements. So when the time comes to move on from the enterprise, either through retirement, because you want to free up time to start another venture or because you want to take life a little easier – it’s only natural to have concerns about who you hand the business over to. Your company is the embodiment of everything you’ve worked for – with some not insignificant risks along the way. While selling might seem the easy option since it leaves you completely free of emotional involvement, the reality is not so simple. Picking the right buyer and ensuring the business is running smoothly before you make your exit can ease the strain of handing over the reins, and ensure the longer-term success of the company too.
Beware the competitor
One option when selling a company is to look for a trade buyer on the open market. If the company is very successful with good prospects and favourable market conditions, this may be the best way to achieve the highest price. There are two major potential pitfalls here, however: one is that your company’s books will be open to scrutiny by your competitors if you include them on your list of buyers – not a comfortable position to be in, though perhaps bearable if they’re willing to pay over the market odds. The other thing to consider is that selling a business to someone on a purely commercial basis, often involving an integration of your company into theirs, will leave you with no influence over how the buyer treats your employees, how the company is run, and the ongoing company ethos.
It’s not what you know it’s who you know
Selling the business to existing managers can yield benefits on multiple fronts. People who have worked in the business for a number of years, perhaps working their own way up the ranks, will understand intimately the workings of the organisation. Having worked under your tutelage, often directly, they are more likely to do things ‘your way’. If they have been in the organisation for any length of time, they will have contributed to its success and are likely to have a vested interest in its continued growth and development. Moreover, potential investors tend to view sales to existing managers (a management buy-out) favourably.
Before rushing into a management buy-out, however, it’s worth considering one potential downside: if the transaction fails, members of the management team may be demotivated or even leave – which could impact negatively on the future of the business.
Types of buy-out
There are a number of different buy-out options worth considering and professional advice is recommended when considering a sale to make sure you get not only the best price, but confidence that the business will continue to be run effectively in the future, too.
Types of buy-out include:
Management buy-out
In a management buy-out (MBO), the business is purchased from the existing owners by its management. Investors favour MBOs because continuity of management usually reduces risk. Managers benefit too, because they have a golden opportunity to grow the company to their own advantage.
There is a clear disadvantage to selling to an MBO, however, which is that the possibility of an MBO may deter other bidders, resulting in a lower price, or the other buyers refusing to be a stalking horse for the MBO. Involvement in the MBO could also distract managers from the day-to-day running of the company.
Management buy-in
A management buy-in (MBI) involves the business passing to an entirely new team, typically with Private Equity funding. MBIs are much more difficult to achieve than MBOs and they are deemed riskier by investors because the new management team won’t be fully au fait with what they are buying. This could affect the level of funding the MBI is able to raise, and therefore the price they’re willing to pay.
BIMBO
The BIMBO is a combination of a management buy-in and a buy-out. In a BIMBO, key people such as an investing Chairman, Finance Director or Managing Director are added to an existing management team, perhaps to replace an exiting owner or simply just to strengthen the team. This combination can be ideal in that it provides new, backable, management together with the knowledge of the existing management team.
Structuring the deal
Buy-outs are typically financed through a combination of equity, debt and other forms of finance including deferred payments and vendor loans. Small-scale buy-outs can sometimes be financed through a combination of equity provided entirely by the management, deferred payments and debt from a clearing bank.
The level of personal equity provided will depend on the management’s personal wealth and security, although the majority of the funds will normally be provided by third parties such as private equity funds (including Venture Capital Trusts), banks and asset-based lenders.
Business plans and a due diligence report will also be needed to satisfy the concerns of external investors/vendors. The business needs, after all, to generate returns for investors as well as service its outside funding.
Conclusion
Selling a business is not just about getting the highest nominal price you can – though that’s obviously a major consideration. Handing over an enterprise you’ve sweated and toiled over to make a success, also has an emotional impact. Simply passing the business to the highest bidder and seeing it disappear as an independent entity, may not satisfy the entrepreneurial desire that drove the owner to set it up in the first place. Selling to existing managers, and perhaps bringing in new management to replace exiting owners, can ensure the company continues with the same ethos and beliefs as before while encouraging the new owners to drive things forward.
One thing that’s certain: getting it right from the outset is crucial because once the business is sold, there’s no going back – you can only sell it once. This is where expert advice and consultation from business advisers and corporate finance specialists can prove invaluable in planning and managing the best route for you to unlock your investment.