By Ged Tilley, CEO at SG Berkshire
There comes a time when all business owners think about putting their feet up and settling into retirement.
For the post–war baby boom generation that time is here, with more and more looking to sell their business and give up work. With the UK economy growing at its fastest rate since the recession began in 2007 there has never been a better time to plan for the future and how to exit your business.
However, selling on your lifetime’s work can be problematic. All too often business owners face ‘transfer failure’, i.e. they are unable to find a suitable buyer, resulting in their firm going into liquidation or the employer delaying their retirement.
In 2011 The Corporate Finance Network revealed that more than 80,000 businesses in the UK with a turnover of less than £10 million run by over 60s are wound up when they could have been sold on. This is nothing new. In 2004 the Department of Trade and Industry’s Small Business Service reported that 100,000 businesses a year close due to ‘transfer failure’.
If you are unable to pass on your business to a family member then chances are you may look to a business broker to administer a trade sale. Business brokers still operate in an unregulated market and often take significant upfront fees for writing the ‘sales document’ and marketing activities, generating revenue and profit regardless of whether or not this effort results in a sale. Ultimately, you will rarely get a fair price for your business and could have to work through an earn-out of three to five years.
Of course, it is not all about the money. It is only natural to feel a sense of responsibility to your management and staff, some of whom will have worked loyally and with you for many years, and the community your business has served economically and in terms of employment. There is also every chance a trade sale will see your business sold to a competitor, or at least see a rival firm acquire information on finances, customer base or intellectual property which could be used to its advantage during the marketing process. Any such takeover would likely result in redundancies and significant changes which may not match the traditions ethos and foundations on which your business was built.
Management buyouts (MBOs) are another option, but it has become increasingly difficult in recent years with banks cutting back on lending. This could mean your management team having to give their house up as security or you raising the necessary money through a venture capitalist. The latter can put pressure on your business as the timescale of exit can be very tight with the investors wanting to drive up the value of the business and sell it on in a short space of time. There are also additional disadvantages of no immediate payout and little support in assisting the management in running the company.
Bearing all this in mind, it is therefore important to plan your exit strategy well in advance, typically three to 10 years depending on the size of the organisation. It has been suggested that business owners should think about how they will sell their company from the moment they start or take ownership in order to attract buyers further down the line. Another key factor in preparing for sale is to ensure you have the right people in place, which again will help in finding a suitor, as well as retaining or even enhancing the company’s value. This can be achieved by reducing your role in the day to day running of the business, or hiring to fill skills gaps, which will both make for a smoother transition. In addition, it is important undertake due diligence in terms of finance to offer assurance to any potential buyer. Having a clearly defined growth strategy will also attract investors.
As an alternative to traditional methods of exit, SG Berkshire has developed a new, innovative and ethical solution aimed at retiring vendors. Management Involved Buyout (MIBO) and Management Employee Involved Buyout (MEIBO) involves SG Berkshire taking a majority share of the company with the incumbent management team (and employees in the case of MEIBO) taking significant equity. In doing so, the vendor is allowed to leave straightaway and the management continue to run the business. With investment secured from SG Berkshire and the management/employees, the business owner can step into retirement confident their company will continue to prosper long after they’ve gone.