Top 10 things entrepreneurs get wrong when exiting

1. Having untidy accounting records and agreements

To successfully get your business through a due diligence process (that almost all buyers will insist on carrying out), your accounting records need to be as coherent as possible. It’s also useful to formalise any verbal agreements and close out any contingent issues. Having clear accounting and business records will give the prospective buyer a greater level of certainty in your business, meaning they are more likely to see a process through to completion. In some owner-managed businesses, the finance function can lag behind the rest of its operations, so if this is the case with your situation, you may want to speak to an advisor that can support with getting records up to scratch to prepare for a sale.

2. Overreliance on founder

Dependency on the incumbent business owner makes a business less attractive to potential acquirers, who may question whether the business can continue its success without the owner. It often leads to offers with long earn out periods to ensure the founder sticks around to facilitate the transition to new management and maintain business performance. To avoid this, when preparing for an exit you should look to reduce your role as much as possible and put in place a strong management team that can effectively run the business on your behalf. View our article ‘Is your leadership devaluing your business’ for more on this subject.

3. Not evaluating all exit options

As covered here, there are a variety of forms an exit can take. Typical routes we commonly see are trade and PE sales, management buyout/buy in and Employee Ownership Trusts. Each form of exit has different advantages and disadvantages, so it’s worth understanding each of them to identify which will be most appropriate for realising your objectives (e.g. maximising return, maintaining culture etc).

4. Not hiring appropriate advisors

You wouldn’t hire a rocket scientist to perform brain surgery. A similar outlook is required when approaching a potential exit. Specialist exit advisors will differ from the everyday accountants you might use for bookkeeping/audit, so if you’re planning to sell your business, you should consider hiring specialist financial, tax and legal advisors. We have seen many horror stories where founders have not engaged with advisors only to find they needed them mid-way through a process, which caused unnecessary complications.

5. Not understanding what potential buyers will value

A key prerequisite for being a successful entrepreneur is conceiving and delivering exceptional products or services. However, entrepreneurs don’t always understand how a buyer might attribute value in their business. For instance, you may have multiple revenue streams which all contribute to the business at different rates. Trade buyers in particular may only be interested in streams that compliment what they do, so if you’re targeting these buyers, it may be advisable to allocate fewer resources to revenue streams you know they won’t be interested in and more to those that they will be.

6. Exit timing

The activity and strength of the M&A market in any sector can change quickly based on macro and micro economic trends. Periods of high activity can be leveraged to maximise the value of your business and attract the highest possible multiple. Getting your business ready for sale as early as possible means you’ll be able to act quickly and take advantage of favourable market conditions when they arise. Several businesses were caught out when the Entrepreneurs Relief tax rules changed in 2020; had they been prepared for exit sooner, they may have been able to execute an exit before it took place.

7. Poor tax planning

Any proceeds you make from selling your business will be subject to tax, so make sure you have the right tax structure in place to maximise benefits. If you’re planning on becoming a serial entrepreneur, it may be advisable to explore the option of Business Asset Rollover Relief to defer Capital Gains Tax. There are also other reliefs you may be able to take advantage of such as Business Asset Disposal Relief (formerly Entrepreneurs Relief). We have seen situations where businesses have poor tax planning in place, which means owners suffer from poorer returns.

8. Not understanding the demands of a sale process

Sales processes are demanding from both a time and workload perspective. Any founder about to embark on one should have measures in place to ensure the day-to-day trading of the business does not suffer while their time is taken up elsewhere. If current trading does slip, it can lead to awkward conversations and provide opportunities for a buyer to price chip.

9. Lack of trust in the buyer

Although it may be difficult, there has to be a degree of trust between the buyer and the seller for an exit process to run smoothly. Without this, you may end up arguing over every point, build frustration and ultimately risk the deal falling over. You should approach a transaction with an open mind and prioritise maintaining a good relationship with the buyer. Advisors can be useful in this regard by having the difficult conversations on your behalf.

10. Unrealistic value expectations

When planning for an exit you should take time to develop an informed understanding of the valuation you expect to achieve. If you neglect to do this and have unrealistic expectations, then you are likely to drive buyers away who may dismiss an approach out of hand if the valuation expected is way above market rate. While you want to maximise value, starting negotiations on the right footing will facilitate discussions.

Find out more about what to expect when exiting your business

View the rest of the articles in our series 'Selling your business: how to plan your exit strategy' to find out the essential elements you'll need to consider when planning for a successful exit.

Plan your exit strategy