Exit

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Having prepared your business for exit, the goal now is to ensure that you realise the value you expect.

Whether you are considering a full or partial sale, private equity investment, an employee ownership trust or IPO, our role is to help you secure a clean exit, delivering peace of mind and the outcome that is right for you. 

This period is demanding both in practical and emotional terms so collaborating with trusted advisers who know you and the business is essential.

The right exit strategy for you will depend on a range of factors, including:

  1. Your personal goals, including whether you want a complete exit or to retain some involvement in the target business post completion
  2. Who the right buyer or investor is and their needs
  3. Your risk appetite

Exit routes

There are several ways to exit a business:

Company sale

This involves selling the shares in the target company to the buyer. The buyer acquires the company in its entirety, including all assets, liabilities, and obligations.

Typically, selling the company provides a clean break for you, with no direct responsibility remaining except for any liability under the contractual terms of the sale agreement. 

As only the ownership of the shares in the company is transferred, its assets (including its emloyees, the business contracts, agreements and licences) remain with the company so from the outside, very little will appear to have changed, other than the share ownership.

Asset sale

Most acquisitions are company sales, but in some cases, an asset sale may be preferable due to specific factors.

Under this structure, the company sells some or all business assets to a buyer. The company itself, rather than you as the shareholder, is the seller.

Only the assets and liabilities which the buyer specifically agrees to purchase are acquired, with everything else staying with the company, save for employees will automatically transfer to the buyer under TUPE.

Buyers who are concerned about potential liabilities or specific business issues may insist on structuring the deal as a business sale so they can cherry-pick certain assets and liabilities.

Initial Public Offering (IPO)

This involves listing the company’s shares on a public stock exchange, for example the London Stock Exchange for large, established companies or the Alternative Investment Market for small and medium growth companies.

Investors are then able to purchase these shares, which provides you with liquidity and the company with capital for its growth. 

IPOs are rarer than share or asset sales and generally fit businesses with high growth and market appeal.

Employee Ownership Trust (EOT)

This involves the ownership of the business being transferred to a trust for the benefit of its employees. 

As the seller, you will transfer either all or a majority of your shares into the employee ownership trust. A key question is who then runs the company as EOT ownership creates a different framework for running and operating a business and making commercial decisions, compared to a sale to a third party.

Key points to consider include:

  • Whether you sell most or all your shares to the EOT as this impacts the future governance
  • Who the EOT trustee is
  • The responsibility of the board of directors for day-to-day operational matters

EOTs must satisfy certain criteria so early engagement on the right framework is important. 

Contrast picture of blonde business woman working on a plane

Identifying the right buyer or investor

At its simplest, buyers or investors fall into two categories:

Strategic/trade buyers – these are typically companies that operate in the same (or similar) sector. Often their motivation for acquiring a company is because it compliments their existing business or represents an opportunity to increase market share or gain access to a new market.

Private equity buyers – these are typically firms who manage funds from institutional investors and high net worth individuals. They acquire companies to increase value and sell them for financial returns within a set timeframe tied to the fund’s lifespan. Because these buyers have different short- and long-term goals, they are drawn to different types of companies. Understanding their motivation for acquisition, and whether your company fits (or could fit) this motivation and profile, will help to ensure the focus is on attracting the most appropriate buyers for your company.

Managing your risk appetite

A key role is to manage, and limit, the sell-side risks so that you retain the value you are expecting.

A key point here is how the purchase price will be structured. At its simplest, cash is paid on completion, with no post-completion adjustment mechanism or deferred payments. This can be fairly rare, and a lot of transactions will involve an element of post completion adjustment and/or payments, for example:

Consideration based on completion accounts

Accounts of the company are drawn up shortly after completion and used to determine the final amount of consideration payable by the buyer.

Earn-out arrangements

This involves a future payment tied to a specific formula, usually dependent on the company’s performance after the sale.  An earn-out can serve several purposes, such as providing a more precise valuation or incentivising and retaining you if you continue with the business after completion.

Deferred consideration

This is a specified sum that will be paid in the future, often contingent upon reaching certain milestones or on predetermined dates.

Alongside the purchase price, the transaction documentation will contain a number of contractual provisions including:

Warranties

These are assurances about the company or business. To protect the buyer against liabilities which may exist in the company or business, you, as seller, will typically be required to give a number of warranties covering all aspects of the company or business. If any of these assurances are untrue and as a result the value of the company/business is less than the buyer paid for it, you may be liable to pay damages to the buyer under a breach of warranty claim.

Indemnities

A buyer may look for indemnities (promises to reimburse the buyer) to cover itself against problematic issues identified during the due diligence or disclosure processes.

Tax covenant

On a share sale, the tax covenant will contain a series of indemnities regarding the tax position of the company.

Your advisers can help limit your exposure to potential claims by:

Disclosure

Ensuring that you properly disclose all relevant information to the buyer during the due diligence and disclosure process.

Protection

Negotiating appropriate protections into the sale agreement which limit your potential liability under the warranties and indemnities, including caps on liability and time limits for claims.

Insurance

Considering with you whether a warranty and indemnity insurance policy should be taken out, for example as an alternative to tying up some of the sale proceeds for a long period in an escrow account.

A key point here is how the purchase price will be structured. At its simplest, cash is paid on completion, with no post-completion adjustment mechanism or deferred payments. This can be fairly rare, and a lot of transactions will involve an element of post completion adjustment and/or payments, for example:

Consideration based on completion accounts

Accounts of the company are drawn up shortly after completion and used to determine the final amount of consideration payable by the buyer.

Earn-out arrangements

This involves a future payment tied to a specific formula, usually dependent on the company’s performance after the sale.  An earn-out can serve several purposes, such as providing a more precise valuation or incentivising and retaining you if you continue with the business after completion.

Deferred consideration

This is a specified sum that will be paid in the future, often contingent upon reaching certain milestones or on predetermined dates.

Alongside the purchase price, the transaction documentation will contain a number of contractual provisions including:

Warranties

These are assurances about the company or business. To protect the buyer against liabilities which may exist in the company or business, you, as seller, will typically be required to give a number of warranties covering all aspects of the company or business. If any of these assurances are untrue and as a result the value of the company/business is less than the buyer paid for it, you may be liable to pay damages to the buyer under a breach of warranty claim.

Indemnities

A buyer may look for indemnities (promises to reimburse the buyer) to cover itself against problematic issues identified during the due diligence or disclosure processes.

Tax covenant

On a share sale, the tax covenant will contain a series of indemnities regarding the tax position of the company.

Your advisers can help limit your exposure to potential claims by:

Disclosure

Ensuring that you properly disclose all relevant information to the buyer during the due diligence and disclosure process.

Protection

Negotiating appropriate protections into the sale agreement which limit your potential liability under the warranties and indemnities, including caps on liability and time limits for claims.

Insurance

Considering with you whether a warranty and indemnity insurance policy should be taken out, for example as an alternative to tying up some of the sale proceeds for a long period in an escrow account.

We understand the intensity of the exit process. Our team works closely with you to maintain control, reduce friction and deliver a transaction that protects your interests and rewards your journey.

“A well-executed exit isn’t just the end of a chapter, it’s the start of what comes next.”

Dominic Davis Partner

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