Exit Planning/Strategies November 30, 2019

Growing a business to sell: exit strategies

Growing a business to sell - exit strategies

You’ve built up your business, and you’re ready to sell. But which route to market is best for you, and your business?

In this article, the fifth in our series on growing a business to sell, we interviewed Vistage speaker, Jo Haigh, about the four different sell options available to a typical SME and a bonus fifth option if you head up a much larger concern.

A highly distinguished businesswoman,  Jo Haigh is CEO of fds Group, and a regular presenter for the Institute of Directors on corporate governance, mergers and acquisitions. She has held 40+ non-executive roles, is currently a non-executive director of 10 different companies, and has bought and sold over 400 companies in the last 26 years.

Here are is Jo’s overview of the exit strategies available to business owners, followed by some key insights on how to best prepare for a sale.

Exit strategy #1: Management buy-out (MBO)

This quite simply means selling your business to its management or senior leadership team. An MBO is a good option if your management team has created a lot of value in the business, or is vital to maintaining that value. An MBO may also be worth considering if an alternative exit strategy would risk losing the senior team either in part or in its entirety.

There are two types of management buyout. The first is called a Vendor Initiated Management Buyout (VIMBO), which is when a management team initiates a purchase of the business. The second is a Buy-In Management Buyout (BIMBO). A BIMBO is when the existing management team brings in an outside manager with skills and/or money to facilitate an acquisition.

Bear in mind that the management team may not have the skills, experience or desire to run the business—so don’t assume this is option is a viable one. An MBO is also not the most lucrative exit strategy for obvious reasons - the management team will hold a great deal of bargaining power. But if you need to keep this team onside and in situ, you may not have much other choice.

Exit strategy #2: Sell to a private buyer

Selling to a private equity investor like a venture capitalist is usually the quickest way of selling up if time is not on your side. Private equity investors don’t have to raise money and their credit process is fast. However, the cost of this speed and convenience is that you are unlikely to recoup the full value of the business. 

It’s important to realise that private equity investors don’t bring any assets to the business and won’t get involved in day-to-day activity. So, to keep the business operating profitably after selling to a private equity investor, you will need buy-in from the management team. You may also need to stay in the business yourself for a while.

Exit strategy #3: Horizontal trade sale

A horizontal trade sale is when you sell the business to a competitor, either nationally or internationally. This can be a lucrative exit strategy for most SMEs because competitors are likely to value your business more, and pay more, than private investors.

A horizontal trade sale is when you sell the business to a competitor, either nationally or internationally

In comparison to selling to a management team or a private equity investor, selling to a competitor usually adds more value to the business. You may, for example, end up with two teams in each department—finance, sales, HR, etc.—which is an opportunity for fast growth.

Having said that, like all other other exit strategies—with the exception of an MBO—you may need to incentivise the senior management team to stay on after the sale.

While trade sales are more lucrative than other exit strategies, they can take longer than a private sale, and a vertical trade sale can be even more lucrative...

Exit strategy #4: Vertical trade sale

A vertical trade sale is when you sell the business to a customer or supplier, either nationally or internationally. A vertical international trade sale is currently the most lucrative exit strategy, for two primary reasons:

  • Exchange rates are favourable for UK based business owners
  • There are a lot of inter-company savings to be made

The downside of a vertical trade sale is that it takes longer than a private sale and you may need to invest in a long-term incentive plan for the management team. 

Exit strategy #5: Initial Public Offering

An initial public offering (IPO) is a process in which you offer shares of your private company to the public. While an IPO can be extremely profitable, it’s a very long and expensive process— requiring an investment of hundreds of thousands of pounds—so it’s not a viable option for most SMEs. 

How to maximise your business’ sale value

Regardless of the exit strategy you opt for, there’s a lot you can (and should) do to prepare for the sale. We discussed this in our article, Growing a business to sell: Getting the foundations right, but having bought and sold over 400 companies, Jo has some specific recommendations:

Go through vendor due diligence

It’s extremely rare for a company to go through the due diligence process of a sale and think, “we’re doing so much better than we thought!” In reality, due diligence almost always throws up a lot of problems that need to be solved before a sale can go through.

One way to mitigate this risk is to go through a process called Vendor Due Diligence. This is when you take your company through a self-imposed due diligence process ahead of the sale so you can pick up any issues—and correct them—before a prospective buyer does. This will help keep the integrity of the deal together when the time comes to go through official due diligence.

Perform an audit at least two years before selling

Do a company audit two or three years before you plan to sell. This way, just like Vendor Due Diligence, you’ll give yourself enough time to get all of your accounts in order before selling.

Review contracts for anti-novation clauses

Some contracts contain anti-novation clauses which means the contract is no longer binding when the ownership of the company changes. So it’s sensible, if not essential to check all of your contracts with suppliers, customers, etc. in advance of a sale and make sure they are robust.

Protect intellectual property

Ahead of a sale, protect as much of the company’s intellectual property (IP) as you can. Protected, you can count the IP as an asset, which will increase the value of the company at the time of a sale.

Get rid of and/or declare litigation

If you buy shares, you always take on the liability, so the warranties and indemnities procedure of a sale can be very scary. That makes the disclosures process incredibly important. Make sure you get rid of, or at the very least declare, any issues related to litigation.

Incentivise staff to stay

A big challenge with selling a business is to retain key staff following the change of ownership. Most new owners will want to see strong evidence that key personnel will stay with the company because, if they don’t, the value of their new investment may drop. That’s one advantage of a management buy-out. But if you decide that’s not the best exit strategy for your company, then do what you can to keep staff by utilising things like long-term incentive plans.

Remove yourself from the business

If you’re the most important person in the business at the point of sale, the new owners won’t want you to leave. So, assuming you want to walk away immediately or soon after the sale, it makes sense to minimise the need for personal involvement in the business as soon as possible.  

The best exit strategy

Ultimately, the best exit strategy depends on the size of your business; how valuable the management team is to the company; the desire of the management team to run the business; how quickly you need to sell, and whether you would prefer a fast or lucrative sale. Whatever strategy you decide on, it’s vital to prepare your business and its team thoroughly. This preparation will ensure the business’ onward success, and allow you to enjoy the fruits of your effort in building the business up. 

For more advice on growing a business, take a look at our ebook ‘Going for Growth - have you got what it takes?’


Image credits: Adobe Stock by Polarpx and Unsplash


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