Getting Exit Strategies Right for Business Owners is Critical

By Mark McEnroe, Deals Partner, PwC Ireland

Having worked hard to build a successful company and create a legacy, selling a business can be a high-stakes, emotional event. How can businesses ensure a well-structured exit process?

Despite economic headwinds, corporate and private equity investors have unprecedented access to capital for potential deals. As valuations increase, sellers are expected to be more rigorous and unwanted surprises in a deal are more costly. Sellers need to give confidence to buyers to move transactions toward a successful conclusion. Proactive preparation has become mandatory. Processes have accelerated and become more data-driven. Quality of earnings analysis and sell-side due diligence are becoming commonplace.

A well structured exit process has five distinct phases:

Making the decision to sell

It is important to identify the business and personal goals and objectives, both monetary and non monetary, of selling your business. To a large extent, these considerations determine the right exit strategy. Being proactive at the outset empowers you to assert more control when the time is right. It also enhances the eventual value of the business to buyers.

The process of identifying objectives will help you determine the right exit strategy. Objectives will be both financial (liquidity, valuation, tax/estate planning) and non-financial (succession, employee and other stakeholder concerns and family dynamics).

Understanding the buyer universe

It is important to see the business through the eyes of potential buyers. Are you going to manage a continuing role in the business? What are their expectations about control? Can you determine the appropriate transaction structure and reconcile both the buyer and seller objectives?

One of the smartest moves you can make to sharpen your selling story is to look at your business through the eyes of a buyer. We believe the earlier you step away from the day-to-day and study the business afresh, the more time you have to make substantive changes that add to the value of the business. 

Preparing the business for a sale

The actions required when preparing your business to be sold include:  Putting together the best package;  Valuing and evaluating the business, including price expectations;  Determining the right time to sell; Conducting a pre-sale checkup and corrective actions; Preparing sell-side due diligence; Preemptively addressing potential buyer concerns;  Managing employee expectations and putting in place appropriate retention packages in the transaction setting and turning complexity into confidence.

The deal process

You’ve made the decision to sell. You’ve considered the possible types of buyers and the type of sale that will work well for your business. You’ve considered the value of the business and geared up for an actual sale process, building a package to present to potential buyers. Now you’re ready to approach potential buyers and begin the actual sale process.

Preparing for life after the deal

How are you going to preserve and transfer the wealth generated by the exit from your business? There are estate and tax planning considerations. It’s important to recognise  that managing wealth well is not too dissimilar to running a business. You have alternatives to preserve wealth for a long time and to ensure it flows where you want it to in the most tax-efficient manner as possible.

Five key actions to take now are:

1.Align the business objective with the sale objective: Once the decision has been made to sell, the business switches to a faster gear, you need to remain focused. If attention to the day-to-day operational matters gets pushed aside, the business will likely suffer just when optimal performance is critical. At the same time, you’ll need to step aside and think through everything that the sales process will impact, from other shareholders and employees to lenders, suppliers, customers and competitors (who may become a buyer). 

2.Select key management team participants and retain trusted specialists: Demonstrate the depth of management and deal capabilities to move to a close. For owners, the art lies in forming the optimal internal team. The right people must be identified to gather information and interact with buyers. At the same time, the group must be narrow enough to control the consistency of the seller’s message and minimise overall distraction from day-to-day operations.

3.Get ready for deep dives: Unpleasant surprises can quickly derail buyer- seller momentum and deflate perceptions of worth. Comprehensive sell-side due diligence will take much of the mystery out of valuation exercises. It should reflect considerations of the key drivers of the business from both the seller’s and buyer’s perspectives. The process helps identify areas that have deal and value implications and prepares and coaches management to address the issues with potential buyers. 

4.Identify buyers and what’s important to them: Transactional value depends to a great degree on who’s doing the purchasing: buyers interested in potential synergies and cost savings or private equity sources seeking an anchor investment and focused on optimising the financing structure and putting their capital resources to work. By better understanding a buyer’s philosophy and attitude toward value, a seller can begin to understand how this outlook applies to the attributes of the business and its emerging valuation. An external market perspective also prepares owners to present the most credible and most compelling picture of future growth and profitability.

5.Evaluate potential tax and transaction structuring alternatives and review the legal landscape: Entrepreneurs / business owners typically prefer to sell shares in the trading company and incur only one level of tax. There are a number of tax reliefs available for personal shareholders in such instances to help reduce the effective tax rate where certain conditions are met (e.g. entrepreneurs relief / retirement relief). Alternatively, the establishment of a personal holding company pre-sale is often seen as an attractive option for individuals to divest all or part of their business. Exiting through a personal holding company can be efficient from a tax perspective whereby certain conditions are satisfied to avail of an exemption from tax at the level of the personal holding company divesting of the shares.