Weighing up the sale options for your business

If you’re considering selling your business or realising some of the value in it, now or in the coming years, it’s important to properly understand your exit options.

The good news is you don’t necessarily need to decide on which route you’re going to pursue now, and potentially not even at the start of a sales process. Your focus at this point should arguably be on creating optionality and retaining it – for example, do you have the growth and management team for a PE deal? Do you understand your trade buyer population and are you adjusting your business model to maximise their interest in you? Are you prepared for a process – do you have the financial information, controls and governance to get through what can be a gruelling process?

Optionality also creates the opportunity for competitive tension through a wider buyer pool. The sales process will ultimately enable you to assess the relative merits of each option with the context of the best positions that each option can be taken to – only then do you need to make your decision.

There are principally four choices available:

• Minority sale to private equity (PE)

• Majority sale to PE

• IPO

• Trade sale

There has been a marked increase in the number of minority PE deals in recent years, given the attractiveness to de-risk an element of your personal wealth that would otherwise be tied up in your business, while retaining the majority of the equity as it continues to scale. Minority investment is available from most of the traditional mid-market PE funds, as well as a growing number of minority-specific funds. Minority investors often refer to themselves as “passive investors”, who will be less hands on than the majority investors, providing “patient capital” where the timing of the PE house’s exit is more flexible, being “lighter touch” on due diligence requirements and “less onerous” on key legal terms. That being said, they will still want a degree of control and protection for the investment that they’re making.

Majority PE investment is what it sounds like - the PE house taking a majority position. Whether the PE house is able to take a majority position is, in some cases, a factor of the level of cash out they’re comfortable providing. The general rule of thumb is that if you’re a key member of management without clear succession, you’ll be asked to rollover at least 50% of your proceeds. This ensures you are aligned in driving the future growth of the business alongside your new investor. Therefore, depending on the roles of the shareholder base, their relative re-investment versus that of the incoming investor may be higher, creating a minority PE deal in that instance. A PE deal, whether minority or majority will enable you to place equity in the hands of your wider management team, enabling you to align your team to create value over the investment term.

The availability of an IPO as an option is dependent on whether the markets are open – which has not always been the case given the events of the last 36 months. We anticipate that they may start to open up again towards the end of this year – providing a credible alternative to a PE and trade sale – albeit consideration should be given to the scrutiny and expectations that come with being a listed entity with an investor base to be accountable to.

A trade sale provides the opportunity to maximise your day one proceeds, given that trade buyers will likely look to acquire 100% of the equity in the business, to be free to integrate your business and take the benefit of all revenue and cost synergies. This means neither you nor your management team will share in any of the future growth of the business. It does provide the potential for a clean exit, after a 6 to 12 month handover period. However, you will want to consider the cultural fit of the prospective buyer to ensure it represents a good home for your business and former team.

Bear in mind that although you’ll be selling 100% of the business, given the chance, trade buyers will often seek to hold back proceeds through instruments such as deferred consideration or earnouts, payable later based on certain scenarios or financial performance, to mitigate the risk of earnings not being sustained or not growing in line with projections post deal.

Intuitively, a trade buyer should be able to outbid PE given their access to revenue and cost synergies. In essence, the earnings they will be able to structure their offer off should be higher in their hands. However, as often as not, for the right assets, PE have proved themselves able to outbid trade.

Why is this? Well arguably the key driver is the significant amount of undeployed capital that they are collectively yet to invest. Given the imbalance of available funding versus investment opportunities, where a business represents an attractive proposition for PE (e.g. because of it’s growth, market opportunity, resilience) competition for the asset can be fierce, driving up the price.

This swell of PE money has come from the performance of PE as an asset class. Research from the British Venture Capital Association (BCVA) shown that the average return on PE investments over the last decade has been a highly impressive 20%. As such, PE represents a highly attractive place for major investors such as pension funds, sovereign wealth funds and high net worth individuals/family offices to place their money.

There are differences to be aware of in terms of the actual sale process itself. The deal is likely to move and conclude faster with a PE buyer – they’re doing it all the time and will be following a well-established track with their own roster of trusted advisors in support.

In a trade sale, the buyer may move more slowly as it might be new or unfamiliar territory for their business; they may have more cumbersome governance processes and it could take them longer to satisfy themselves that they’re prepared to do the deal.

Whoever the sale is to, expect there to be significant levels of due diligence. You can help yourself in several ways here. Firstly, by putting in the groundwork before you even begin to look for a buyer: ensuring your statutory audits are clean, your tax compliance is up-to-date, and that you have strong systems of management information and reporting. This will build confidence in any prospective buyer as you will have more robust evidence to support the key selling messages. Secondly, conducting pre-deal preparation and vendor due diligence (when you get to deal stage) which an advisor like KPMG can carry out for you. This may not be required for a trade sale, but it will be needed for a PE deal and/or if you go to sale via auction. It should mean you receive more informed bids with a reduced risk of subsequent price chips. Compiling your own due diligence information should also streamline the buyer due diligence process, potentially helping the deal conclude more quickly and minimising execution risk.

At KPMG, we can help you start to think through the options with an Exit Readiness assessment which will give you an objective readiness score and recommendations for concrete actions to become deal-ready; while our Vendor Assist service can support you with deal preparation and transaction support as you near the commencement of a formal process. It can reduce the cost of, and accelerate, full vendor due diligence.

As with the sale itself, there are a number of preparatory options – helping you maximise the possibilities and achieve the best outcome according to your personal ambitions and the dynamics of the business you are leading.