Selling your legacy to achieve financial freedom


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Selling your legacy to achieve financial freedom

SME MASTER PLAN SERIES – PART 4 OF 4

This is the last of our four-part series aimed to help SMEs leverage opportunities to boost their business in these distressing times.

You may have restructured your business (see our previous article), you may have accessed the required funding and you may have even achieved your desired growth objectives.  It may now be time for you to consider moving on from the business. This is one of the most emotionally difficult decisions you may need to make.

In this article, we focus on how tosuccessfully sell your business to achieve financial freedom”.

Whether you are selling because you are tired or just looking for a change, you need to be motivated to sell.  Once the decision has been made, you need to start planning the process and carrying out the required preparation.

A small to medium business enterprise (SME) is often an integral part of a person’s life.  Aside from the financial aspect, the business can provide an environment for socialising, both in and around the workplace, and is often where long-term relationships are formed. Selling your business could be akin to giving your daughter away at her wedding.

We have probably all heard someone say that they have been ready to retire for ten years, but just can’t take that final step.  It certainly comes with mixed emotions.  If you are not entirely ready to move on from your business, it will be a waste of time and resources to start the process that you may be unwilling or unable to complete.

If, however, you are ready and have made the decision to proceed, it is important to know what options you have to realise the hard work of your legacy.

The following may be considered as ways to unlock the value of your hard-earned work:

  • Management buyout;
  • Trade sale;
  • Merger;
  • Private equity/Investor sale;
  • Public listing; or
  • a hybrid of the above.

1.  Management buyout

This audience should know the business well (so due diligence can be minimised).  However, the reason they have remained as management and have been loyal to the business for so long could indicate that they may not have the entrepreneurial nous to run a successful SME.  You may have doubts as to their ability to succeed and thus may be hesitant to allow them to take such risks.

There are ways to overcome these issues, such as a gradual equity take up, with you guiding them for a set period.  This process takes longer and you are part-funding the sale, but it comes down to a choice, do you want them to take over or do you want your money unlocked so you can move on?

Management buyouts can be structured, including earn-outs, if the owner wants to do this.  However, given the emotional baggage, you should do this with a skilled advisor.

2.  Trade Sale

The next easiest market to sell to are those in your market, whether they are competitors, suppliers or distributors.

Such a sale comes with its own risks.  In the case of a competitor, letting them look at your books could be a risk.  Whilst not as high of a risk for suppliers or distributors, there is still some risk.  These risks can be minimised, especially through properly drafted documentation and other due diligence strategies.

This type of sale could often yield a good multiple of maintainable earnings as the business can be integrated into existing businesses with savings for economies of scale and overheads.

Such a sale can be structured in many ways; from full payment and walk away to earn-out and management buy-in.

The final structure is dependent on the owner’s will and the purchaser’s appetite.

3.  Merger

As discussed above, an owner can choose to maximise the best price by merging with a like business and taking an earn-out over an agreed time, at an agreed multiple subject to certain milestones.

Such a sale structure is often a good way to ease out of a business whilst maximising the best price.  Certain people could also be rewarded by some equity holding in the new company.  Brand and culture trade-offs may occur.

This process can be flexible but also emotionally challenging.  Someone else may now be calling the shots, which is a situation you have to be able to live with.

4.  Private Equity Fund/Investor sale

Selling to sophisticated investors, whether they be individuals, companies or funds requires a great deal of preparation.

The information required and the due diligence process are often onerous for an SME.

Some of these purchasers will require you to remain in the business with some shareholding alongside them until they exit.

They do however bring strong management control and access to capital.

They will have a plan to exit in a defined period.  If you pick the right partner/investor, this could be a lucrative path to take.

It’s always difficult to know how to pick the right partner.  You need someone with SME knowledge and the right culture for your business.  Do your homework – talk to companies that have invested previously etc, as the wrong team can be costly.

5.  Public Listing/Offering

Not many SMEs qualify as a candidate for public listing.  The cost of a listing often outweighs the benefit.  However, if you have a scalable business and require access to lots of capital, this could be the most appropriate structure to unlock some wealth and let the rest grow.

Remember, every company started as an SME (Microsoft started in a garage).  It takes longer to fully exit in this way, but if done successfully could ultimately be far more rewarding.

Legal Perspective

There are many legal considerations and principles involved when buying or selling a business for both parties to consider.   It can be a complex process and it is important to receive legal advice before you commit to buy or sell a business.

To assist with this, our good friends from Ash St. Legal & Advisory have put together a handy checklist (see below):

What to look out for when buying or selling a business:
Whether you are the seller or the buyer of a business, or of shares as part of a sale and purchase, negotiating legal transaction documents is all about risk mitigations.

legal perspective ash st

Financial perspective

Preparation must also include analysis of financials, preparing the business to be sold and negotiating the sale of your business.  As well as having accurate financial records, your insurance, legal documents and contracts should all be up to date.

Author profile – Riad Tayeh

Riad is a partner at dVT Group. He has over 30 years insolvency and accounting experience and enjoys a reputation as a tough-minded and astute practitioner, offering clients an energetic and practical approach to business solutions. He is a registered liquidator and specialises in insolvency, corporate restructuring, financial investigation and turnaround strategy.

dVT Group has a proactive, practical and pragmatic approach in the way we collaborate and provide advice.  We can efficiently distill the issues and provide sound, common-sense solutions, sometimes fitting square pegs into round holes!

Special thanks to Ash St. Legal & Advisory for their contribution to this article. 

Questions:

If you have any questions or need help with any of the above, we would like to work with you.  Please contact Riad Tayeh at dVT Group on (02) 9633 3333 or by email mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.

To read our complete series, see below: 

Part 1 – Setting up the right business structure click here
Part 2 – How to obtain growth through acquisition click here
Part 3 – Accessing funding for business growth click here

 

November 2020