Time To Exit? The 3-Year Cycle
You’ve decided that you want to sell your business next year or the year after. When you say, sell, that’s not the same as exit. You may well transfer the shares in your company to a new owner BUT that doesn’t necessarily mean that you can leave the business on that day!
In the UK, 3 out of every 4 deals have an earn-out attached; in other words you will receive part of the sale value, or consideration, as a cash sum (remember that you will need tax advice!) with the remainder being delivered in tranches against performance objectives over a period of time. These are generally based on revenue and/or profit targets.
This type of deal structure is found particularly in service-based businesses with minimal tangible assets.
The average earn-out period can be up to 2 years. For many business owners this is an acceptable situation as they don’t want a full exit on Day One, preferring to be involved in a defined handover period to provide continuity. For others a deal structure involving an earn-out is something they would rather avoid. A good broker will always discuss potential deal structures and will include your instructions in the marketing prospectus and negotiation meetings.
While earn-outs can often open up deal possibilities that may not otherwise exist, it is imperative that a seller entering into such an arrangement takes advice from a reputable commercial lawyer with experience in deal structures.
As well as the tax and legal considerations on earn-out deals, business owners should consider the time difference between selling their shareholding, effectively relinquishing control of the business, and being able to exit fully.
Add to this potential 2 year exit period another year for the time it, typically, takes from instructing your broker to completion of a sale, this makes a total of 3 years from the time you first make the decision to sell until you actually leave the business.
A recent report showed that 33% of SMEs plan to exit their business over the next five years, yet 40% had no exit plan in place! An exit plan is an essential part of every business plan because it will significantly affect your personal net worth in the future, so getting this in place well in advance will pay dividends whether you decide to sell or not because it will help you identify how to get the business into the best shape for growth or exit.
Right now, there is an additional circumstance that will have a bearing on sale conditions – the baby boomer effect. As the economic outlook improves, business owners in their 50’s and above will be selling their companies and this will have an effect on the supply/demand dynamic, effectively moving it from a seller to a buyer market.
When taking all these factors into consideration, business owners wanting to exit before 2015 should be planning their exit strategy now! For those wanting to exit in 2014 or this year, they should be speaking to a business advisor now.
For a fast and easy way to discover the sellability of your business, why not use our online sellability score tool. In a matter of minutes it will show you whether your business is best placed to sell for maximum value and will also give you a raft of valuable information on how you can affect any necessary changes.
Alternatively, come along to one of our free Business Masterclasses where, in an informal workgroup setting, we outline the various stages of selling a business, encompassing exit planning and what acquirers look for, the best deal structures and the most effective ways to protect your post-sale assets.
It’s never too early to consider how and when to exit your business. To find out more, please call us for a confidential discussion.
About Evolution CBS
Evolution CBS are experts in Business Sales, with team credentials that span the disciplines of Corporate Finance, Sales and Marketing. Working with private businesses, with turnovers is excess of £1 million p.a., we have led more than 500 successful completions, across most industry sectors, totalling more than £2 billion in transaction values.
Delivering excellent service and the highest degree of professional integrity, we help business owners to achieve the best price and the best exit terms when they sell their business.