One of the biggest challenges you face as a business owner is deciding who will take over the running and ownership of your business when you retire. There are a number of alternative possibilities that should be explored…

1. The Trade Sale

If you have a strong management team who can run the business without you, and your company has a great product or service, you may well find you are in a good position to sell to a third party buyer for the price you want. They may be a supplier looking to secure their supply chain, someone wanting to enter into your market for strategic reasons, or perhaps they are a competitor.

You will want to ensure that a confidentiality undertaking is given by the buyer at the beginning of negotiations as no doubt, once the legal due diligence process begins, you will be revealing the ins and outs of your business.

Care should also be taken around the structure of the payment terms – earn-outs and deferred consideration can be tricky to negotiate and these are becoming more and more common. Here are our top tips:

• Make sure you maximise the up-front cash. If you have enough certain cash the earn out can be the icing on the cake.
• Fix your earn out by reference to the turnover of your business or its gross profits, not its net profits: that way there is less opportunity for an unscrupulous buyer to fiddle the figures.
• Keep the earn out period as short as possible:  the longer the period the greater the risk of a fall out between you and the buyer.
• Negotiate ring fence undertakings to protect your earn out: these are things the buyer cannot do to your business during the earn out period.
• Protect those ring fence undertakings with a liquidated damages clause: that way a breach of the undertakings does not leave you in in the impossible position legally of trying to prove your loss.

2. Management Buyout

If a trade sale is proving to be unlikely, you may consider selling your business to your management team. After all, they know you and your business better than a third party buyer.

A great place to start (as with a trade sale) is “Heads of Terms”. This will iron out the high level detail quickly so that everyone can concentrate on managing and growing the business while the legal advisers worry about the detail and complex drafting.

It may be tricky to obtain external funding  to cover the full price so any deferred payment terms will need to be carefully considered as obviously this is more risky than cash up front.

Here are our top tips:

• Ensure you have appointed a lead adviser to guide you and your team early on in the process (perhaps even years in advance);
• Get everyone round the table and agree Heads of Terms;
• Consider the strengths of your management team and whether you/they should consider bringing someone in “from the outside”;

• The key to making an MBO a success is to have a clear plan and process. You don’t want this to turn into a huge distraction which could be detrimental to your business.

3. Vendor-Funded Management Buyout

So you’ve concluded that your management team are the best buyer for your business, but with external funding in short supply, and your team already likely to have large amounts of borrowing against their names, how are they going to fund it?

Don’t despair. With the right security in place, you could become a banker to your own deal, being paid out of the future cash flow of the company.  Here are our top tips:

• Plan ahead – a vendor-funded management buyout combined with an employee share scheme can be a great motivational tool to get your team to help you grow the business;
• Retain a small minority interest in the company when you sell to your team to allow for a secondary exit in the future;
• Ensure that there will be a reasonable upfront payment, perhaps funded by bank debt or the sale of an asset;
• Have security in place to keep your team on the straight and narrow during the payment period;
• Only go down this route if you have absolute confidence in your team!

Objective independent advice from an experienced adviser will be critical to your succession planning. Remember to start the planning process early if you are wanting to sell….

For further information, please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 or email everyman@everymanlegal.com