Orr Litchfield
Solicitors and Business Lawyers
Solicitors and Business Lawyers
Just as there are many different reasons why people start to run or continue to run a business, there are many different reasons why people cease to run their business. What is inevitable is that, at some point in time, every business owner will have to transfer the ownership of or sell their business. If you are selling your business then, in order to maximise the value on the sale, you need to be in control of the process from start to finish. This requires detailed thought and planning. The earlier you start the sale planning process, the better your chances of getting more value.
Unless you are a serial entrepreneur or investor, it is likely that you will only ever sell a business once. Whilst you may have years of experience starting, developing and managing your business and may have had the opportunity to learn from your own mistakes over time, it is unlikely that you will have any (or any significant) experience of the task of selling a business. In addition, you are unlikely to have the opportunity to learn from mistakes in selling your business. However, it is likely to be one of the most difficult challenges that you will ever encounter as a business owner.
Whilst all businesses, particularly those in the same sector, are likely to have some similarities, ultimately all businesses and the individual circumstances of all business owners are unique. Accordingly, the best solution for one owner on the sale of his business may not be a desirable solution or may not be the optimum solution for another business owner. The sale of your business will, hopefully, lead to you obtaining a return on a valuable financial asset. However, it is also likely to affect your personal life and the lives of your family, your employees and those with whom you have been doing business. Ideally, you should prepare and implement a carefully thought-out and well-planned exit strategy in order to realise the best possible outcome for you and any others for whom you wish to provide or whose interests you wish to protect.
In this article, we focus on typical reasons for selling a business and the critical importance of effective and early planning.
You may be able to choose when, how and to whom you sell your business, but sometimes some or all of those decisions are wholly or partly determined for you by a range of legal, financial, operational and personal circumstances.
Your decision to sell your business may be based on purely financial reasons or other business or lifestyle factors. There are many reasons why businesses change ownership. These include retirement, lifestyle change, new business opportunities, capitalisation, family succession, a need for greater resources and skills, competitive pressures, existing or perceived future financial difficulties, concerns about industry change, the death or illness of the owner, the loss of a key director or employee, or simply because you have been offered a price that is simply too good to turn down.
Retirement is the most common reason given for selling a business. The benefit of selling due to retirement is that there is often plenty of time available in order to plan an exit strategy and achieve the maximum sale value for your business. However, many private business owners are unwilling to seriously investigate opportunities to transfer ownership before they are forced to do so by age or illness. This is often because they are emotionally, as well as financially, connected with their businesses. Unfortunately, every year thousands of business owners aged over 60, who have been running profitable small and medium sized businesses for years, end up winding up their perfectly healthy and solvent business when they could have sold them for a significant sum of money if they had taken the time to plan an exit strategy. Do not let yourself be one of those business owners! Make sure that you plan your exit and realise the value of your business, which you have used your energy, skill and time to develop.
It may simply be that the owner has ceased to enjoy running a business and wants a temporary or permanent break. Running a business is often time and labour-intensive. As it grows, the entrepreneurial business and technical challenges that were once exciting motivators are often replaced by more mundane administrative, financial or human resource-related challenges, which the owner does not wish to continue doing.
An entrepreneurial business owner may have identified an opportunity in a different sector of the market or a different industry, which he considers to be potentially more financially or personally rewarding. In order to enable him to focus all his attention on this new venture, he may have to realise the market value of the business by selling it to someone who can give it the time and effort required.
If the business has been successful and has a healthy valuation attached to it, and there is no prospect of family succession, it may be that the owners would simply like to realise the value of their business by selling it. This could be used to fund other investments, and/or allow the owner to retire comfortably.
The time may have arrived for younger family members to assume control of the business. Family succession often requires careful handling in order to ensure that family disputes are avoided.
Sometimes the business owners succeed in growing their business to such an extent that they no longer have the resources, knowledge or skill-set to develop it further. In order for the business to develop, it may need to become part of a bigger group with more resources by way of acquisition, merger or sale.
Intensifying competition is a commonly stated reason for ownership transfer. Often, competitive pressures increase as a result of growth in the number of competitors in the market or consolidation bringing pressure on margins, particularly where it is combined with a fall in demand (whether due to the economy or changes in customer demands) . Moreover, in certain businesses, that competition may be national or international rather than simply local or regional.
When a business owner is required to relocate for personal or business reasons, it may be possible to simply relocate the business but there may also be various issues to deal with such as dismissing or moving current staff, hiring new staff, moving property and potentially changing suppliers. In such circumstances, business owners often choose to sell the business and move on – often buying a similar business with the proceeds of their sale.
When a business is reaching the point where it needs significant capital investment to replace existing or obtain new assets (for example, new machinery or technology), a business owner may choose to sell the business to someone who already has such assets or who is more willing to take on such risks.
This is a common reason for selling a business. Turnover and/or profitability may be declining and the owners may take the view that they are not in a position to stop such a decline. It is common for business owners to wish to sell their business when they feel their business has reached the peak of its profitability and they often want to get out before the decline starts.
Few business owners want to sell their business when it is booming as they wish to enjoy the fruits of their hard work and are keen for it to continue. However, a growth business will usually sell quicker and at a better price because astute investors are ready to take advantage of future market success. Accordingly, a period of sustained growth is always a good time to review your exit strategy.
Business owners usually seek continued growth in accordance with or exceeding their plans. When this does not happen and there is a decline in performance, an owner’s motivation and energy may be reduced particularly where he is already overworked. Owning a business that is struggling is often stressful. Unfortunately, a decline in turnover, profits and performance will also mean a lower sales price. If your business is at this stage, you need to try to determine whether it is preferable to keep it running and increase profits and performance sufficiently to command a better sale price in the future or sell it now due to the risk of the business deteriorating further still.
Concerns about existing or perceived future changes in the industry could include economic, technological, social or political changes such as a general national, regional or local downturn; the development of more effective and efficient technology; new legislation or the likelihood of it being brought in or broader issues such as Brexit.
The success of many small businesses is primarily due to the hard work and dedication of the owner. If the owner dies or is no longer able to continue taking an active role in running the business, the performance of the business may suffer and its value may decline. Unfortunately this a common reason for selling a business. In such circumstances, it is important for the business owner or his representatives to try and act quickly to get the business on the market.
The loss of an important business colleague can be a catalyst for the sale of a business, particularly where such a person is likely to be difficult to replace.
The decision to sell may simply be opportunistic. If you own a business in a sector where there is strong buyer demand and favourable buyer conditions, then you may be offered a price that is simply too good to turn down.
Ultimately every decision to sell a business is based on individual circumstances. There is value in most businesses so, if you wish to sell your business, there is always likely to be a buyer no matter what your reasons are for wishing to sell it. However, the earlier you create an exit strategy and start preparing your business for sale, the better your chances are of getting more value from the sale. In order to maximise your return from your sale, you need to be in control of the process from start to finish, which requires detailed thought, preparation and planning. Creating a viable exit plan and keeping it up to date means that you will be ready to take advantage of any good opportunity to sell your business.
Need to talk?
Whatever stage of the business sale process you have reached, we can help you to understand the business sale process, to choose the option that is right for you and to realise the value of your business.
Contact us
If you would like more information about selling businesses or would like to discuss a potential or existing transaction, please contact us by telephone on +44 (0)20 3126 4520 or +45 38 88 16 00 or by email at enquiries@orrlitchfield.com
