Home Legal & Insurance Guy Lachlan – Senior Associate Corporate Commercial Solicitor at Clough & Willis...

Guy Lachlan – Senior Associate Corporate Commercial Solicitor at Clough & Willis – on how to exit a business in an uncertain economy

Guy Lachlan

One year ago, exiting a business was on the agenda for many people – primarily thanks to the availability of funding for leveraged transactions. At that time, GDP had quickly picked up post-lockdown and the Bank of England was forecasting inflation of “above 5%”. Things seemed to be on the up; those were the days! Even though the economic climate has changed, we are still seeing sales happening and being planned for. There is, without doubt, optimism alongside a big dollop of realism, but the key for anyone looking to exit is to know their objectives and to plan, plan and plan.

It’s important to state that the challenges which the UK economy is facing are not limited to just our own shores. Inflation in the EU is hovering around the same as our own. Predictions are that it will fall over the coming months, and if that happens then there will be a much-needed swing in confidence. The wholesale price of energy is dropping even though it is still around three times higher than this time last year. That is positive news and will, hopefully, be a catalyst to speed up the process as they have a direct effect on supply costs, the supply chain and, of course, consumer demand.

For anyone looking to exit a business there are two key things which should always be central to every sales strategy. Firstly, make sure the business is an attractive purchase proposition to potential buyers; and structure it in such a way as to make it a win-win situation as uncertainties are every deal’s worst nightmare. These may sound obvious, but you’d be surprised at how many people overlook the basics.

One of the most common requirements in a sale is to ensure continuity of management.
This usually means the exiting owners agreeing to stay on for a set period to ensure that goodwill properly beds in. Consultancy arrangements of up to 12 months, or perhaps even longer, should be considered. Flexibility is king. However, if the exit is via a management buy-out, then continuity of management is less likely to be a problem – especially if the MBO has been properly planned in advance.

Owners also need to be flexible on price as this could make the difference between the business being an attractive proposition to more than one purchaser meaning negotiations with multiple prospective buyers can take place. It will also reduce the risk of the firm being left on the shelf as unmarketable and give a stronger bargaining position to dictate some of the negotiations, including the timeframe. A realistic headline price will always entice purchasers, unless – of course – the market is substantially dysfunctional. If this is coupled with either an offer to defer or to make part of the price subject to an earn-out, then it becomes even more attractive.

Funding is another aspect that needs to be carefully looked at. Some purchasers use almost none of their own money, preferring instead to leverage the purchase and use future profits to fund the entire acquisition. This is obviously the ideal situation for them, but it is not necessarily good for the sellers because it could place the business under serious financial pressure – especially if the buyers do not know the market or are inexperienced. However, if structured well, deferrals and earn-outs can work brilliantly for sellers too; for example – where other simpler structures are not available, or where they would not achieve their desired price.

It is imperative that contingencies of price need high levels of trust and openness between all parties. They require careful planning, realism, measurability and must provide some security for the sellers. The win-win aspect comes from the fact that both sides stand to prosper and that this comes at the expense of neither party.

Despite the current conditions, it’s not all about distressed sales as good businesses are still selling. The key takeaways from all of this are that the onus is on the seller to do everything they can to make the company and deal as attractive as possible; and if he or she gets part-way into a transaction and finds that any of the key factors are missing or cannot be agreed then it may be prudent to pull out and wait for a more principled buyer to come along. That can be a tough call to make, but the potential losses will be a lot more painful.