The three stages of a business exit

Entrepreneurs Series

How do you manage the conflicting priorities of a business exit? What should you think about first, commercial or personal implications?

By working closely with trusted advisors from the outset of the process, owners can be reassured that they have access to the expertise they need to make fully-informed decisions at each stage of the journey.

Stage 1: Laying the foundations

Whether you plan to sell your business imminently, within five years, or even if you eventually decide to pass on the company to the next generation, every business owner should take the step of protecting against an uncertain future.

At the start of the business sale process, safeguarding personal interests can sometimes seem like a secondary set of considerations relative to commercial objectives. However, as Gabrielle Keller, Director, Strategic Financial Planning, HSBC Private Banking, notes that robust personal planning should be the foundation of every exit strategy.

“Entrepreneurs sometimes forget they’re not immortal! All business owners should ask themselves what would happen to their families in unforeseen circumstances, such as a serious illness or even death. Will they be well provided for? This is particularly important if there are family members who are reliant on their business for income. Would the business remain sufficiently funded in their absence? Without a well thought through succession plan, owners can run the risk of their business failing if they are not at the helm, for reasons beyond their control.

Even for those business owners who choose not to go ahead with exiting, this exercise is a critical one. Having your house in order provides peace of mind that the next generation will be taken care of.”

On the commercial side, owners should reflect upon the goals of the sale before embarking on the exit process. Whether you hope for a partial sale, a phased exit or a total exit, this introspection will help to define the narrative you provide to prospective buyers. Your story will become a critical part of the investment case for a buyer, who will want to understand the vendor’s motivations and how the business may look without them.

The continuity issue is always salient for investors approaching family-owned businesses. If the founder intends to step away entirely from day-to-day operations, there could be conflicting business and personal priorities at play.

Purvi Amin, Director, Global Solutions Group, HSBC Private Banking says “Providing continuity maximises valuation. Investors will ask: can this business not only survive, but thrive, without family members present?”

Stage 2: Securing the right sale

Once the sale process gets underway, business owners will face twin challenges: maximising valuation and deal certainty, while minimising management time.

Working with trusted advisors can be personally reassuring at what is a stressful time for owners, who are about to embark upon major life-change. “We find clients value having professional guidance at hand to unpick the detail and to ask the right questions, particularly during some of the more technical conversations with lawyers and accountants.” Gabrielle observed.

“There are danger areas during Stage 2, particularly in relation to the technicalities of the deals being proposed. Clients need to work with the right people, who are able to stand in their shoes and make sense of the available options. This is the time to work through the some of the potential tensions and conflicts between the best personal and commercial options and good guidance is invaluable.”

Advisors also often play a crucial bridging role between personal and corporate planning. From the commercial angle, business owners usually know their core market well but struggle to identify options when international expansion is on the table. Corporate advisors can support here by helping define the buyer universe and designing the right process to test market interest.

Purvi commented, “I’ve worked with a lot of families who have had what we call ‘softer’ objectives: protecting the family brand name, safeguarding employees, securing the involvement of key family members. These issues impact not only valuation but also the type of process and bidder universe.

Sellers will have to create and complete a business plan identifying what the business is worth, which generally varies from buyer to buyer. They will need to consider how the business may grow under new ownership and how that translates to value.”

Stage 3: Planning your wealth strategy

After a successful exit, entrepreneurs often face a large lifestyle shift. Some will embrace retirement; others will struggle to step away from running a business and will soon be itching for the next big opportunity. Whatever the venture, wealth planning should be a priority.

Depending on the sale and purchase agreement, some entrepreneurs will now have a lump sum of cash at their disposal, while others will continue be involved in their former business in some way, through an earn-out or deferred consideration. For all sellers, this is the time to pause and reflect upon how proceeds can be used to realise their long-term vision for both their wealth and their family’s.

At this point it will be critical that personal and corporate advisors complement each other to support wealth planning. Returns from financial markets will not always replicate the earnings that owners are accustomed to from their businesses. Financial planners will typically want to sit down and calculate the impact of the sale on personal cash-flow to help sellers plan to meet lifestyle costs in the long-term, stress testing various options.

Personal advisors will meanwhile play an important role in supporting on some of the difficult conversations that happen after a sale, including those with family members who may have to make significant personal adjustments to their lives once money becomes more readily available. “One consistent worry, we find, is the responsibility that comes with this money and how to prepare children appropriately. Concerns can span a number of wealth planning considerations, from how to help the next generation to become financially literate, to how to avoid wealth detracting from children’s own aspirations, to how to protect them from unwanted attention. Given how sensitive some of these topics can be to discuss within the family, involving external advisors can help to mitigate some of the inherent family emotions or tensions as well as provide reassurance that all bases are being covered.”

As Gabrielle concluded “In our experience, these questions around the security of wealth and protecting their families, keep our clients up at night. By working with a trusted network of advisors, entrepreneurs can sleep easier, knowing that they have the right expertise at hand to help them plan for a successful life after exit.”

For more information on how HSBC Private Banking can support you during the planning and executing of your business sale, please contact your Relationship Manager.

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