A successful business exit strategy isn’t something that happens overnight. For shareholders looking to sell in the next 3-5 years, early preparation is key to ensuring that the company is attractive to buyers and achieves the best possible valuation. At Herrington Carmichael, we support business owners throughout this process and have set out some tips below to pave the way for a smooth exit.

Preparing your Business Exit Strategy: Maximising Enterprise Value

Buyers typically value businesses based on both financial performance and risk profile, and will pay a premium for businesses with strong, predictable, and scalable performance.  In the 3-5 years leading up to exit, it will be important to review the business’ revenue streams and identify any areas which can be improved.

Key things to consider when looking to maximise enterprise value include:-

• Recurring revenue (providing future income certainty through subscriptions, retainers or long-term agreements);  

• Customer diversification (ensuring the business is not overly-concentrated on solitary customers or sectors); and

• Cost efficiency (maximising profit margins and reducing overheads).

Internal vendor due diligence

Undertaking your own vendor due diligence before taking your business to market allows you to proactively identify and resolve issues that could otherwise result in price-chips, indemnities or potentially derail a transaction in its entirety. This could include:-

• Reviewing commercial contracts for key risks such as non-assignment clauses, change of control triggers, uncapped liabilities, absence of minimum term or commitment provisions or short termination periods;

• Ensuring employment and HR compliance, including proper documentation for employees, consultants and directors, and a clear record of disciplinary or grievance matters;

• Reviewing Intellectual property ownership and ensuring that all IP created by employees, contractors or founders vests or has otherwise been formally assigned to your company; and

• Ensuring regulatory compliance, particularly in sectors with FCA, CQC, data protection or health and safety requirements.

Buyers will often uncover these issues during their own due diligence process so finding and fixing these issues early allows businesses to remain in control and avoid any unwanted surprises.

Beyond the factors set out above, there are other actions now that you can take to make your exit as efficient as possible, including:

Reviewing employee incentive schemes

Exit events often trigger the exercise of share options or vesting of growth shares. It is therefore essential to understand how employee incentive schemes will operate on a sale. What is the process for exercising the share options? Will they dilute existing shareholders? Have any EMI schemes been disqualified? Can the options be exercised on a cashless basis? These are all important questions to consider prior to putting your business on the market.

Structuring for sale

Complex or outdated group structures are common in growing businesses, particularly those that have developed through acquisition or organic growth. Buyers typically only want to acquire the core trading entity rather than any legacy subsidiaries, dormant companies or non-core assets.

It therefore may make sense to hive up key assets or businesses into the main trading company. Alternatively, a capital reduction demerger may be useful in separating out different business activities such as trade, properties or investments. Where you have dormant or non-trading assets in your group, consider spinning these out pre-completion to ensure due diligence is focussed on areas that your buyer will be acquiring.

Other structuring options may include asset transfers, pre-sale dividends or intra-group share sales. Each method has legal, tax and commercial implications, so early planning and specialist advice is key.

How we can help

It’s clear that preparing for a successful business exit is about much more than finding a buyer. It’s about presenting a business that is legally sound, commercially attractive and strategically structured. Our Corporate team helps business owners lay the foundations for a successful business exit strategy through our Growth Workshops. If you’re a business owner considering an exit in the next few years, get in touch now to start the conversation.