Selling Your Business: Why Planning Early Can Make All the Difference

By Andrew Reed, Chief Client Officer at Wise Investment, and James Shand of vfdnet

For many business owners, selling their business will be one of the most significant financial events of their lives.

A business may have taken decades to build and could represent a substantial proportion of an owner’s overall wealth. Yet, despite the importance of a future exit, many owners spend far more time planning how to grow than considering how and when they might eventually leave.

Often, the conversation about selling begins when someone receives an unexpected approach from a potential buyer or simply reaches the point where they feel ready to move on.

By then, however, some important decisions may already have been made for them.

The sooner an owner begins thinking about an eventual exit, the more time they have to prepare both the business and their own personal finances.

Preparing for a sale takes time

There is far more to selling a business than simply finding a buyer and agreeing a price.

The value of a business will depend on many factors, while a potential buyer will want to understand the underlying financial performance, future prospects and risks associated with the business.

Owners also have different priorities. For some, achieving the highest possible sale price will be the most important objective. Others may place greater importance on protecting what they have built, looking after their employees or ensuring the company continues to thrive after they have left.

The route taken to exit a business may therefore be just as important as the eventual sale price.

There can be a number of potential options, depending on the circumstances of the business and its owners. These might include a traditional trade sale, a sale to an existing management team or a transition to employee ownership.

The important point is that these decisions are often easier to make when they are considered well in advance rather than under pressure when an opportunity unexpectedly arises.

James Shand of vfdnet recently supported a business owner through this situation. The owner first approached him nearly three years ago for help preparing the business for sale, but a downturn in performance meant the work had to be paused. When the owner later received an unexpectedly attractive offer, he returned to James knowing that the business was not fully prepared for the private equity buyer’s detailed due diligence process. What followed was an intensive eight-month period responding to enquiries from several due diligence teams. Although the owner ultimately secured a fair and favourable valuation, reaching completion placed considerable strain on both him and his wife.

When is the best time to start preparing your business for exit?

We usually start our review between 3 and 5 years before Exit, as this gives you good time to pace the work needed to address any weaknesses.

What does a successful exit actually mean to you?

When people talk about selling a business, the conversation often focuses immediately on valuation.

“What is my business worth?”

It is clearly an important question, but perhaps it should not be the only one.

An equally important question is:

“What do I actually need from the sale?”

An owner may have a particular figure in mind. However, unless that figure is considered alongside their wider personal financial circumstances, it can be difficult to know whether it is actually the right target.

For example, someone might believe they need £5 million from the sale of their business to retire comfortably. Once their pensions, investments and other assets are taken into account, however, they may discover they need considerably less to achieve the lifestyle they want.

Equally, someone may achieve a substantial sale price but still need to consider how the proceeds will provide an income for the rest of their life, particularly if they plan to retire at a relatively young age.

This is where exit planning and personal financial planning should begin to come together.

Understanding what the sale means for your future

At Wise Investment, we work with clients to understand what their financial future could look like once they have sold. That starts by looking beyond the transaction itself and asking what the owner actually wants to do afterwards.

Some may retire completely and enjoy the freedom that comes with no longer running a business. Others may want to continue working in some capacity, invest in another business or take on new projects.

They may also want to travel, purchase another property or provide financial support to children and grandchildren. These decisions all have a financial impact.

Using cashflow planning, we can bring together a client’s pensions, investments, property and other assets with their expected future income and expenditure to create a clearer picture of how their finances may develop over time.

This can help an owner understand how different sale outcomes could affect their plans.

For example, we might consider what happens if:

• The business sells for less than originally hoped.
• The owner decides to sell earlier than planned.
• The sale is delayed by several years.
• Part of the consideration is received over time rather than immediately.
• The owner wants to make significant financial gifts to their family.
• The proceeds need to support a longer retirement than originally anticipated.

The purpose is not to predict exactly what will happen, as nobody can do that. Instead, it is to give the owner a clearer understanding of what they may need from an exit and how different outcomes could affect their financial security.

The personal financial plan can influence the business strategy

This is one of the reasons we believe personal financial planning should begin well before a sale. If an owner knows what they realistically need to achieve financial independence, it can provide valuable context for the decisions they make within the business.

For example, an owner who needs to achieve a certain value may decide to continue growing the business for longer. Another owner may discover that they already have sufficient assets to achieve the lifestyle they want and therefore have greater flexibility about when and how they sell.

Understanding this position can remove some of the uncertainty that often surrounds the sale of a business.

The objective should not always be to achieve the highest possible valuation at any cost. It should be to secure an outcome that allows the owner to move on to the next stage of their life with confidence.

Addiotnally, the owners’ personal objectives will very often influence their preferred exit route. For example, an owner who is more relaxed about achieving top dollar but is adamant that their business, with its unique ethos and values, is given the best chance to remain independent, might favour either a Management Buyout or a sale to an Employee Ownership Trust. An owner wanting to achieve maximum valuation as quickly as possible might lean more towards a trade sale or sale into Private Equity. However, owners should be aware that how well the business is prepared can impact both the valuation and timing of consideration. For example, an owner who is still critical to their business at the point of exit is likely to be required to work for a significant time under an earn-out arrangement, which can be a very frustrating period for the former owner.

Preparing the business and preparing yourself

The process of preparing a business for sale and preparing personally for life after the sale should ideally happen alongside one another.

On the business side, an owner may need time to strengthen the management team, improve systems and processes, address potential weaknesses or consider which exit route may be most appropriate.

Vfdnet’s work with business owners often starts with us providing you an estimate of your business’s valuation, including working through the different valuation assumptions, so helping business owners to better understand how buyers are likely to value their business. We then work through how this valuation might be improved, through growing both the top line and bottom line, looking to improve your business’s ‘sustainable EBITDA’ (Profit). Typically we then work through our own bespoke diagnostic, called Exit ReadiMap, which confirms key strengths but also indicates gaps where improvements can be made. This enables you to work on correcting the gaps in people, processes or profitability, so significantly improving your prospects of completing a successful Exit which meets your objectives.

On the personal side, financial planning can help the owner understand what happens once their wealth is no longer tied up in the business. This can be a significant transition.

For many years, a business owner may have had most of their wealth invested in something they know intimately and over which they have considerable influence. Following a sale, they may suddenly have a substantial amount of money sitting in cash or investments. This creates a completely different set of financial decisions.

Managing wealth after the sale

Sale proceeds may need to support an individual and their family for many years. This means it is important to consider how the money should be managed once the transaction is complete.

How much should remain in cash? How much investment risk is appropriate? How much income will be required? What are the potential tax implications? How does the money fit with other assets, pensions and investments?

At Wise Investment, these decisions form part of the wider financial planning process. We consider a client’s attitude towards investment risk, but also their capacity for loss and their wider financial circumstances. Someone who has sold a business and has more than enough money to meet their future spending requirements may be in a very different position from someone who needs their investments to generate a significant proportion of their future income.

Because Wise Investment manages clients’ investments ourselves, our financial planners and investment team can work closely together to ensure the investment strategy reflects each client’s wider financial plan.

The money received should not simply be invested and forgotten about. It should continue to be reviewed as the client’s circumstances, objectives and financial needs change over time.

A joined-up approach

Selling a business can involve several professional advisers, each with an important role to play. There may be accountants, lawyers, tax specialists, corporate finance professionals and financial planners involved at different stages of the process.

The challenge for a business owner is ensuring that these different areas of advice work together. The earlier the planning begins, the easier it can be to have the right conversations at the right time.

James’s experience is focused on helping owners consider their future exit and prepare the business for the route they ultimately choose.

At Wise Investment, our focus is on helping clients understand what that outcome could mean for their personal financial future.

These are two sides of the same conversation. A business sale is not simply about the price achieved. It is also about what that money allows the owner to do afterwards.

Start earlier than you think

For many people, their business represents the largest financial asset they will ever own.

Selling it is therefore not a decision that should be left until the last minute.

Beginning the planning process in good time can provide space to improve and prepare the business, consider the options available and understand what the owner personally needs from a sale.

At the same time, a personal financial plan can provide valuable clarity around what life might look like after the transaction has taken place.

The earlier these two conversations begin, the greater the opportunity to make informed decisions.

How vfdnet and Wise Investment can help

Selling a business is a complex process, and every owner’s circumstances will be different.

James and the team at vfdnet work with business owners to help them prepare their business for a great exit (however you as the business owner define a great exit).

At Wise Investment, we help business owners understand the personal financial implications of a future sale.

Through cashflow planning, we can test different scenarios and help clients understand what various outcomes could mean for their lifestyle and longer-term financial security. We can then consider how the resulting wealth might be managed, taking account of their future income requirements, investment risk, capacity for loss and wider financial objectives.

Ultimately, successful exit planning is about more than selling a business.

It is about making sure that the years spent building that business help provide the future you want once you decide to move on.

If you are considering selling your business, even if that is still several years away, now may be the right time to start the conversation.

About the Authors

Andrew Reed is the Chief Client Officer at Wise Investment. With 30 years’ experience in financial services, Andrew oversees the firm’s client service, financial planning and administration teams. He works closely with clients to help them understand their financial position and plan for their long-term future.

James Shand is the founder of vfdnet and an experienced Virtual Finance Director who works with SME business owners on business growth, financial strategy and business exits.

James has been involved in over 30 successful deals and has helped clients raise over £30m of funding. Of the deals James has been involved in approx. 20 were trade sales (acting for acquisitive companies and exiting business owners), with several recent deals being business sales to Management Buyouts (MBOs) and 7 business sales into Employee Ownership Trusts (EOTs).