For many business owners, selling up is the ultimate objective, however, it is probably only when you start to consider the idea of selling your business, that you become fully aware of the broad and varied range of options available. You could sell to the management team in a Management Buy-Out (MBO), it could be acquired by a Trade buyer or an Investor, and more recently the option of selling to your employees via an Employee Ownership Trust (EOT) has increased in popularity.

Once that decision to sell your business has been made, it’s vital that you understand how the selling process works. While it does vary from business to business, the general steps are always broadly the same. So, if you are ready to sell your business, read on to make sure you understand these eight key steps, which will ensure you’re fully prepared to get through the process without any hiccups.

1) Appoint professional advisors – Selling a business is not a simple process and an experienced advisor will guide you through each and every stage. The MGroup team can value the business, find suitable buyers, protect your interests during negotiations, and advise on what information to disclose and when. By handling the sales process, we can free you up to concentrate on keeping the business running day to day. Keeping the business running right up until the end will be vital if you want to demonstrate that your business is able to operate without you and in order to keep its value. You will also need the help of an experienced corporate lawyer, accountant and tax planner to make the selling process efficient, avoid value erosion, and to minimise any risks.

2) Type of Exit – You may wish to sell your company to a Trade buyer, looking to make a strategic acquisition, to a private investor, or possibly the incumbent management team perhaps with the financial backing of a private equity firm. The MGroup team can advise you on all of the available options and work with you to agree a plan. There are a range of options to be considered, each with its own pros and cons.

3) Preparing the business for sale – Before you put your business on the market you should strive to make the business as attractive to buyers as possible, and preparation should begin as soon as possible. You will need to do this to the aesthetics of the business as well as the way the business is run. There are some businesses that rely on their equipment and machinery in order to run such as manufacturing businesses. If this is the case with your business, it is even more important that you keep your equipment in good condition. Could you persuade a key customer to renew a contract that is close to expiry, or lower your costs. Get your financial records and other important documentation up to date and filed correctly. You’ll need to provide information to buyers promptly when its requested.

4) Valuing the business – Business valuations, which should be conducted by an experienced corporate finance professional, are based on many factors, including cash flow, revenues and profits, potential synergies, industry sector, but also the value of both physical and non-physical assets. There are many valuation techniques and formulas out there and their application very much depends on the industry, but the most common method is a multiplier of sustainable profits. An asset-based valuation adds up the market value of tangible assets like premises and equipment along with intangible assets like customer goodwill and intellectual property. Cash-flow analysis, meanwhile, projects future revenues and costs – usually for five years– and applies a discount to reflect risk. 

5) Finding Buyers – The MGroup team will put together a comprehensive sales package that presents your business in the best possible light, and approach potential buyers’ business utilising a carefully controlled confidentiality process to manage information disclosure. Quality here is more important than quantity, and with this in mind, your team will qualify and vet any buyer to ensure they are credible and serious.

You should seek clarity in areas such as; What are their plans for the business? Do they have experience in your sector? How do they intend to finance the purchase? Once we’ve found a number of credible buyers who are happy to proceed, it’s time to arrange a face to face or virtual meetings.

6) Negotiations – each interested party will enter negotiations with a value and structure in mind. If during their investigations, problems are discovered, the buyer will look to reflect this in their pricing. Negotiations are as much about how the deal is financed as the price itself, and the buyer will usually want to present a bid made up of an element of cash on day one, with a portion of the funds paid in instalments. Having a professional advisor alongside you is therefore invaluable to keep the sale on track, and to agree a deal that’s fair and acceptable to both parties. Once a deal is agreed in principle, your MGroup team will work with the buyer to construct and agree Heads of Terms.

7) Due Diligence – Usually lasting between 60 and 90 days, Due Diligence (DD) is the process by which the buyer checks whether claims made by the seller stand up to scrutiny, and typically consists of Legal, Financial, Commercial, and Tax related questionnaires being submitted by the buyer. Good preparation undertaken with the support of your advisor can make a huge difference here. The MGroup works with their clients to carefully review all the necessary due diligence related documentation in advance of a sale process working alongside its legal partner network to fulfil this critical exercise, and utilising a virtual data-room to manage the flow of information in a secure environment. The DD process typically involves visiting the premises, detailed analysis of the accounts and contracts, researching the business’s reputation and customer relationships. Trust can be undermined if the buyer uncovers problems during due diligence that the seller obscured in their sales collateral. It is therefore advisable to be upfront with the buyer about any issues that could cause alarm or surprise.

8) Closing the Deal – Once the Due Diligence process is completed, and a final price is agreed by both parties, a binding contract of sale will be signed, and at this point, both parties can celebrate a successful sale. It’s increasingly common for sellers to agree to stay on in a consultative capacity as part of the arrangement for a fixed period post-sale, accepting payments in instalments along the way, so building a trusting relationship throughout the deal process will certainly assist any such future plans.

Employee Ownership Trust (EOT) – Introduced a few years ago, Employee ownership is one of the fastest growing forms of business ownership in the UK. An increasing number of business owners planning retirement are arranging for their employees to take over ownership of their firm, and entrepreneurs creating new businesses are seeing the advantages that employee ownership can bring for business growth. Employee-owned businesses are totally or significantly owned by their employees.

At this challenging time, many businesses will have made their priority retaining short term viability and operating day by day. If you’re thinking about the longer term in your business, this might include a reflection on the future relationship with your employees. 

Some key questions answered

What is employee ownership?

A business is generally “employee-owned” where the whole, a majority or a significant part of it is owned by or on behalf of all its employees (more than 50%). There are three main forms of employee ownership, it can be direct (shares held by employees individually), indirect (shares are held in a trust) or a hybrid of the two.

Why employee ownership?

Sharing the rewards of your business’s success with employees can create a powerful incentive to engage in the business and work together to improve its performance.  

• Employees who are owners are more engaged and committed to the longer term
• Builds a clear shared purpose and collaborative way of working
• Ownership succession which preserves your business and its culture
• Retiring owners can be paid market value for their shares
• Tax reliefs for retiring owners and employees alike

How is it funded?

In our experience, the purchase will be funded by a combination of existing cash and future profits of the trading company.

The MGroup Corporate Finance team work closely with a number of law firms who specialise in employee ownership. Our collaborative and practical approach will help to demystify the jargon and enable you to decide if an employee ownership structure is right for your business, its people and you as owners.

Get in touch

Mark Crossfield
Corporate Finance Partner
m.crossfield@themgroup.co.uk

Ian Walker PDipBPM, AIFS
Senior Manager, Corporate Finance
i.walker@themgroup.co.uk

Geoff Pinder BSc (Env. Science)
Corporate Finance Partner Bsc (Env. Science)
g.pinder@themgroup.co.uk

Click here to meet the team.