Business Exit Strategies: "Bexit"

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Article

05 March, 2020

This article outlines popular exit strategies and highlights some of the important considerations that should be taken into account by owners to help facilitate a smooth deal and exit.

There are several business exit strategies available to owners of a business looking to sell, which typically range from:

  • Buyouts:
  • Management Buy-Out (MBO) - where the core management team acquire part or all of the business or shares in the target company from the current owners. Such acquisition by the management team is usually financially supported by either a credited lender or private equity sponsor (PE);
  • Management Buy-In (MBI) - where an external management team acquire part or all of the business or shares in the target company with financial support replacing the existing management team;
  • Buy In Management Buy-Out (BIMBO) - which incorporates the features of an MBO and MBI, where existing and external management acquire the target company;
  • Mergers and acquisitions (M&A) - where the target company combines with another or group company;
  • Trade sale - where there is a purchase by a company, generally within the same sector or industry;
  • Initial Public Offering (IPO) - where the company's shares are admitted on a public stock exchange;
  • Liquidation - where the company's life is ended and all business assets are sold.

Considerations for an exit

Depending on the nature and size of the transaction, there are various considerations to be taken into account by the respective parties pre-completion of a sale and purchase.

1. DETERMINING THE RIGHT EXIT

Exit focus cannot be underestimated. The first step for the seller is determining the type of business sale to proceed with. Before the viable route to undertake is established, it is important to consider all options available. In order to help determine this, the business should be independently valued before entering into negotiations.

The resulting tax implications for each route should also be observed in ascertaining the optimum viable exit. Specialist accountancy advice should therefore be sought at the outset of exit considerations.

Once the exit route is decided, the seller needs to ensure that the target business is prepared for the due diligence enquiries from the buyer and is in a saleable state.

2. DUE DILIGENCE PROCESS

The buyer will raise various enquiries in relation to the target business, as part of its due diligence, in order to determine whether to proceed with the sale. It is also a vital part of the sale and purchase process for both the buyer and seller, albeit for different motives, in ultimately structuring the price of the deal (or not), in view of the information disclosed.

The type of enquiries undertaken by the buyer will predominantly focus on:

  • Legal: examining the corporate structure, employees, contractual, regulatory and other legal obligations of the target business.
  • Financial: reviewing the accounts, financials and tax position of the target business.
  • Commercial: reviewing the products/services, market position and trading relationships of the target business.

The due diligence process can be time consuming depending on the size of the target business and the (number of) issues identified and raised by the buyer. The buyer will be keen to obtain maximum information on the target business which will be subject to intense scrutiny and review.

Preparation is therefore key to help streamline the process as much as possible and mitigate the risks of the deal falling through, by locating the information and documents at the outset and ensuring the records of the target business are up to date and healthy making it easier for a prospective buyer to review and digest. This will hopefully reduce the number of enquiries raised by the prospective buyer.

It is at this stage when preparing for an exit that the seller should consider any skeletons in the closet! Be open and honest with your advisors - after all they are there to help you achieve the best possible outcome. If you are aware of any issues which could put the buyer off or potentially affect the value of a deal, raise this as early as possible to try to mitigate any risks. Common issues which we come across include employee disputes, ongoing or threatened litigation and potential breach of contracts. The sooner these are highlighted, the sooner the team advising the seller can advise on the options available to avoid this becoming a bigger issue for an exit.

As part of the seller's preparation, consider if any consents are required from any third parties. Check if there any legal charges or financial institutes involved, or landlord consents required, which could delay the sale. Being proactive and contacting them as early as possible will help streamline any exit and prevent any last-minute delays (since third parties won't necessarily be as motivated to progress the deal).

It may also be recommended (or required depending on the level of transaction) for the preparation of a business plan with assistance from professional advisors. A good business plan will assist in capturing the business opportunity for the buyer making it more desirable.

Appointing the right advisors at this stage is recommended to manage the process. Once this process is complete, the deal should be able to progress relatively swiftly.

3. KEY DOCUMENTS
In addition to the common transactional documents required, the following should also be contemplated:

Heads of Agreement - it is important that each parties' objectives are aligned at the outset of the process to help ensure a smooth buyout and exit relevant to any sale or purchase. This can be achieved by entering into the heads of agreement between the parties which will set the expectations and provide clarity on the proposed terms of the sale and purchase

This is recommended on all exit routes. NB: this document is not legally binding on the whole (save for a few provisions) and therefore serves to avoid any unnecessary delays or stalemates relating to the transaction.

Non-Disclosure Agreement (NDA) - does an NDA need to be entered into?

The purpose of the document is to prevent the disclosure of sensitive information by a prospective buyer which, if breached, could have massive repercussions to business operations if the deal falls through. A seller should consider what (if any) sensitive information may be shared particularly as part of the due diligence stage.

Exclusivity Agreement - consideration should also be given on whether this particular agreement needs to be entered into, the purpose of which is to ensure a prospective buyer is given protection from another from outbidding on the deal.

4. RIGHT PERSONNEL
For a well-designed exit route, it is advised for all parties to appoint the right advisors (legal, financial et al.) in order to receive appropriate advice, assist negotiations and for the preparations of the relevant documents and agreements to be entered into in completing the deal. This will ensure that the intended outcome is reached as effectively and efficiently as possible.

Summary

In almost all exit strategies, the above key considerations and documents will apply to all parties, the degree or application of which will be dependent on the value and complexity of the sale or purchase. There are however additional factors and issues which may need to be borne in mind before and during the transaction to reflect individual features of each sale and purchase. Engaging the right team of advisors early on in the process is key for any successful exit.

For more information contact Rebecca McCann in our Corporate department via email or phone on 0333 207 1140. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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