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22 Mar 2021

Exits: six things you need to think about

As much as our entrepreneur clients love their businesses, for many it is the potential for a lucrative exit event that keeps them putting in the hours. The ideas below are targeted at founders looking to exit via a sale of their business, but similar considerations will apply more generally to many exit events. As usual with these articles we have focused on the points that often get missed. In this article we have collaborated with James Heath, an Investment Manager at PwC Raise | Ventures. Both our teams recognise the importance of cross-collaboration and understanding more than one's own area of expertise. We hope you find the following helpful and thought provoking. If there is anything else you would like to discuss, do please get in touch.

Six things you need to think about:

  1. Doing due diligence on your company before a buyer does. It is every seller’s worst nightmare to go through all the cost and effort of finding a buyer, negotiating a sale, dealing with all those lovely lawyers and accountants, only for the deal to fall over due to issues uncovered during the buyer’s due diligence.

The risk of this happening can be avoided if you have done your own due diligence first. Common issues that can easily be dealt with upfront are:

    • Checking where ownership of the company’s IP sits (i.e. not with the company’s contractors or you personally)
    • Ensuring employee and key customer contracts are properly documented and all your company registers are all up to date.
    • Having a robust financial reporting system that portrays financial data in a clean and easy to ready format (reconciled management accounts)

For larger deals, we recommend clients go through typical buyer due diligence queries well in advance of a sale to ensure no last-minute nasties turn up and that all the documents the buyer will ask for are to hand.

  1. Know what is going on around you commercially. An exit will involve a lot of commercial financial understanding. Look to read up on and understand:
    • Current and future economic outlook in your sector
    • Precedent transactions and alternative targets for a purchaser or investor
    • Current and predicted future level of buyer and investor confidence – Is it cyclical?
  1. Tell a story that portrays you winning. As much as anything, attracting investment, customers and possible purchasers comes down to building your narrative. Get involved in competitions as this can generate a buzz around the company and build the brand.  Think about sustainability. As we have already seen, investors no longer regard ESG as an option so think about how you might demonstrate your environmental and social values (beyond mere ‘greenwashing’).
  1. Incentivising your staff. If you are thinking about exiting the business, do not forget that the carrot of a pay-out on an exit event can be a great incentive for staff. Employee share schemes can be very tax efficient, but they tend to be of most use if put in place well in advance of the exit event happening. Our guide to such schemes can be found here: https://www.drive.law/latest_insights/employee-share-schemes/
  1. Alternatives to a share sale. There are lots of ways of getting value out of your business that go beyond selling shares. One commonly overlooked option is setting up an employee ownership trust (or “EOT“). This will not be appropriate for all companies but can end up with you receiving the value of your company free from income tax (as well as rewarding your loyal employees who helped create the business in the first place). See our article here for more details: https://www.drive.law/latest_insights/employee-ownership-trusts-exits/. A more common alternative to a share sale is an asset sale (i.e. selling some or all of the assets of the business). This route is often a good way of getting value out where a buyer only wants part of your company, or if you want to retain certain parts of it.
  1. What you are going to do afterwards. Whether your plan is spending your hard-earned cash on a new house, getting into angel investing, or using the funds to start a new venture, you should do some personal tax planning upfront. This will ensure that you are set up to take advantage of reliefs like entrepreneurs relief and that you avoid CGT/IHT elephant traps. Quite often, professionals advising on the exit fail to advise on post-sale wealth protection and planning. However, this is a key part of the process and should not be forgotten.

Conclusion

The Drive team at Boodle Hatfield has experience in advising a range of different entrepreneurs at the various stages of running a business. The team has been ranked top for smaller M&A deals every year since 2014. Whatever an exit means to you, please get in touch with Hugo Brown or Charlie Hewlett to learn more.

PWC Raise | Ventures help entrepreneurs to raise minority equity between £1m-£30m from institutional investors and have completed over 20+ deals in the last 18 months. Please get in touch with James Heath for more information.