Successful exit strategies
Article Date: Jun 03 2005
Exit preparation
Taking the necessary time to groom your business will minimise the risk of disruption later on. Having to deal with unforeseen issues at a vital point in the latter stages of the exit process could send any deal off the rails, causing delays and, therefore, risks, to soar.
As such, it’s not too surprising that getting experienced, professional advisers on board is by far the most important issue for our CEOs when it comes to seeking out a buyer for the business.
The crucial role that advisers can play is further underlined by the majority of respondents showing that they would, in the first instance, either approach their accountant (45.7 per cent), or corporate financier (32.4 per cent), to help them value their business. Lawyers and banks followed next, with 9.5 per cent and 8.6 per cent choosing these options respectively. This is largely because, as well as putting your operational and accounting matters in order, you need to pay keen attention to all the important legal, contractual and (if applicable) intellectual property issues.
Post-exit strategy
The majority of those surveyed have not got a wealth management strategy in place. But for any exit strategy to bear fruit in the long-term, a close eye will have to be kept on the Inland Revenue. If you are selling your business, minimising any tax liabilities should be a strong concern. If you are handing it down, issues such as inheritance and capital gains tax are of prime importance.
One area that is frequently overlooked in these circumstances is the extent to which a portion of the increase in capital value of a company may be subject to income tax in the hands of the owner-managers (and corresponding NIC charges). This is particularly the case since legislative changes made in 2003 made clear that the founders’ argument, which many owner-managers expect to protect them from any such income tax, is ineffective in the vast majority of cases.
Notes
- Research was carried out amongst 148 CEOs of companies with a turnover of £10 million-plus.
- The average age of respondents is 51 years old.
- To receive a copy of the research report call 020-7430 9777.
Case Study - Networking is key
Peter Smith is founder and chief executive of document management business EDM, a venture that has been going for just over one year. As a venture capital-backed concern, Smith’s exit strategy is already in the pipeline, and this will be the second one he hopes to complete.
His first business, IT concern Hutchison Smith, founded in 1995 and majority funded by Legal & General Ventures, was sold to Hays in 1999, after he had grown turnover from £40 million to £90 million in three years.
‘Three years after founding the business, we were seriously beginning to consider what our likely exit options were, although this had been mapped out in our business plan from day one,’ explains Smith.
Both a trade sale (Smith was approached by Hays) and an IPO were serious considerations, and Smith even went as far as appointing advisers to work on the flotation process. However, at the end of the day, says Smith, ‘the offer from Hays was as good as could be expected.’
Market conditions did influence, to a great extent, his decision, as the timing of the flotation coincided with concerns around the robustness of IT systems and the so-called Millennium Bug.
‘Hays had known us for some time - and I had met with the directors on a number of occasions. Our financial advisers, Granville, were also very well connected, giving us access to a useful network. Whilst at Hutchinson Smith we worked with a number of partners who I identified as potential buyers. You need to develop relationships with your advisers and your peer network,’ advises Smith.
He remained with the business once it had been acquired, as part of the deal required him to stay on a two-year earn-out. He achieved this within a year, and left the business 12 months later to start EDM. ‘I’d had the idea for EDM whilst I was at Hays and I originally put it to the board, but they decided not to pursue it. I appointed advisers to look at all the companies in the UK in the document management area, as I wanted to pursue a buy-and-build strategy,’ adds Smith.
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