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Howard Leigh, senior partner at Cavendish Corporate Finance, looks at whether the current climate presents a good opportunity to exit a business.
It may seem contrarian to suggest that now is a good time to sell your business. After all, the global economy is still smarting from the harshest downturn of the past half-century, governments and consumers are still reluctant to spend and market sentiment is far from optimistic.
However, there are a number of factors: economic, business, cultural and generational that suggest now is a good time for owners of small and medium-sized enterprises to consider an exit.
The good news is that the bad news is clearing. Yes, the European sovereign debt crisis is not entirely behind us, but we can safely say that the calamities predicted by many market observers have been avoided.
Just two months ago, the Eurozone was close to meltdown; now, headwinds are starting to ease. Indices such as the FTSE are now starting to edge up, half-unthinkable a year ago, and the medium-term outlook for Europe is finally reasonable rather than catastrophic.
The US economy has surprised with more bullish growth figures and Japan has upped a gear. All this should allow business owners to be more optimistic rather than sanguine.
Companies seeking a buyer not only have an environment of improved sentiment but they also have the advantage of UK plc sitting on cash-laden balance sheets, one by-product of the keen cost cutting measures many have taken.
So whereas a few years ago, the relative interest was weighted towards financial buyers, such as private equity houses, we are now seeing a significant increase in trade buyers, looking to spend their cash on acquisitions. Inevitably, this more competitive environment translates into more demand and better exit prices.
Overseas buyers, many from emerging markets, are also increasingly taking a keen interest in UK companies, partly out of a desire to diversify into a developed, established economy but also to capitalise on sterling’s weakness – which won’t last forever.
Often overseas firms will pay higher multiples, as they are prepared to pay a premium to secure a base in a relatively stable economy, with strong contract law and a robust business framework.
Those business owners who are tempted to stall by the logic that if things are finally improving they should wait a few years before selling until the economy picks up even more, should remember that the growth projections for the UK from across the landscape of economic forecasters is for relatively subdued growth at best for the next two to three years – the hockey stick shape recovery from probably the severest downturn for generations is not going to materialise.
There is also a generational dimension. Many business owners, now reaching late middle-age have been delaying selling their businesses over the past few years as the economic environment has been too difficult. It would make sense for many, as they look to build up their savings and pensions, to sell now to release cash that will be taxed far more lightly as a capital gains rather than continue to take income for their business, particularly as tax rates, as everything in life, are not set for ever.
From broad experience it also seems true that UK entrepreneurs are very good at innovation, coming up with great new ideas for businesses but not perhaps as adept at consolidating their companies and taking them to that next level of development so selling while their business are still on a strong growth path makes sense.
Having decided on a sale then clearly, preparation is essential. Ensure that spending is geared more to capital enhancement rather than income, by say ensuring IP and trademark protections are up to date.
Make sure that management and financial accounts have been reconciled. Also ask whether a management team is sufficiently incentivised to stay and consider who might buy the firm. Other areas include ensuring that all contracts are up to date, that change-of-control provisions are managed and that non-core assets, surplus cash, investments etc have been dealt with in the most tax-efficient manner.
Being prepared to sell and preparing for sale are very different things. But having primed the business for exit along the above lines, I am sure entrepreneurs and business owners would get as a high a price now as they could hope to command for their companies over the coming few years.
- Finding the perfect exit strategy
- Build value before selling your business
- Know your exit when you enter