Whilst you may be ready to exit, is the business you’re leaving behind ready for your departure? Ensuring your business is in the best possible place for your exit will ensure a smooth transition to the new owner(s). Here are some things to consider:

1 - The right team to deliver

Whilst exiting the business is your goal, you won’t get there on your own. One of the first steps is to share your objective with your senior management team because they will play a crucial role in helping you reach it. But achieving it will also ask a lot of them. Now is the time for a critical assessment of your team to identify any gaps that need filling. Attracting new talent and keeping existing management on board in the period to exit is critical, so incentivising them in a way that supports your exit plan is key.

In most cases, some form of equity share is the best solution, but it is important to make sure that any equity incentive plan is structured not only to motivate your key people but also to avoid any additional liabilities or reduce the attractiveness of your company to a buyer. Remember simple is key in this area. An overly complex scheme will be a challenge for a buyer to unpick.

Option schemes are a popular choice. But it is important to make sure that employees are clear on the rewards and understand that they will only attain them by achieving clear targets. It is all too easy for owner managers to get caught up in the technical aspects and tax efficiency of these schemes yet lose sight of their ability to support the desired outcome: a successful exit. Our expertise in this means we can help you make sure that individual incentives and overall business objectives are both well aligned and tax efficient.

2 - Enterprise Management Incentives (EMI)

EMI option schemes are a popular way for owner managers to reward key employees - but they need to be set up properly. These schemes have the added benefit of being highly tax efficient, allowing the reward to be taxed as capital gains rather than income. Under the right circumstances, Entrepreneurs’ Relief can mean the employee pays as little as 10% tax. This means that an owner manager can pledge less of the equity to get the same net value to the employee. However, maximising tax relief requires that all conditions are met and care must be taken to ensure all the details are in place well ahead of the sale.

3 - Building strong governance

Buyers want to avoid risks and expect to see strong controls in place. Owner-managers would not be in business if they weren’t prepared to take risks – and buyers understand this. But they will expect to see evidence that risks are properly understood, managed and mitigated. Failure to do so can have a real impact on the value achieved at exit or can even result in the collapse of potential transactions. So any key risks must have been identified and appropriately mitigated in advance.

In many instances, this process can be as simple as formalising the controls that already exist. In others, a detailed review of new risks, or changes in the significance of existing risks may need to be considered. Being able to demonstrate a clear control environment and governance structure is essential. Buyers will also expect to see a working and well-structured board, which will also be of great value to your business as you drive towards exit. Key appointments include a strong CFO preferably with experience of at least one transaction and a chairman who has themselves travelled the journey that you are about to embark on as owner. Thinking about these issues early and being on the front foot will help put you in the best position to maximise value.

4 - Having a clear business plan

A clear strategy will provide a set of choices based around a number of financial, business model and operating model levers that build on a company’s strengths. This enables competitive advantage, identifies significant investments of time and money, motivates action toward objectives and improved performance, and mitigates the associated risks. Choices can then be made related to the operating model needed to deliver it.

It’s also important to consider that the buyer or investor will want to see some evidence of value creation and a clear strategy for growth after your exit and in their ownership. A company that has no clear growth plan or has already maximised value may struggle to attract a buyer let alone at a premium price.

When it comes to doing the deal, your business plan will form the basis of your information memorandum (IM) which will be presented to potential buyers. This document will be significantly more robust if it has been developed from a tried, tested and fully adopted business plan.

5 - Accurate forecasting

Robust and accurate forecasts are vital to business managers and inspire confidence at deal time. Transaction forecasts normally need to span three to five years depending on the buyer and are an extension of the budgeting process adopted by most businesses. They should be based on historical data that can be fully analysed. Often this will be the first time a business has forecast that far into the future.

A sale process can take time and can involve reporting three to six months of management information against forecasts issued to the buyer. Testing the accuracy of forecasts before going to market will allow you to refine your business intelligence. You will also find that most buyers will put in place normalised working capital adjustment mechanisms. It is therefore important that the seller has confidence in the forecasts, both P&L and balance sheet, before agreeing to what might be a significant reduction in value at a future point.

When it comes to due diligence, a buyer is going to want to interrogate your model so that they can make their own assessment of the likely future performance of the business. Having a model that is tried, tested and understood by all of the management team will pay dividends and allow each member of your team to own and defend the assumptions pertinent to their area. Your forecasts will also identify any shortfalls in capital required to deliver your business plan. To achieve your goals the business will need to be appropriately capitalised and any shortfall here may drive poor business decision making and detract from value.

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If you'd like to discuss how Shaw & Co can help you sell, buy or fund the growth of a business, please book a meeting here