Continuation of a family business through succession may not be possible, or even desirable, and many owners or managers set up not to create some kind of family dynasty, but with the express purpose of selling it, either to retire or to go off and do something else.
SMEs are of growing interest to the private equity industry, according to a recent survey by Cass Business School and Lyceum Capital, which found that deals below £50m – the largest proportion of SMEs – accounted for 80% of all private equity buyout activity in the UK in 2015.
Nick Harrisingh, corporate partner in Trowers' London office, finds himself acting for a lot of what one might term 'classic' entrepreneurs contemplating selling up.
"They've started the business right out of university, grown it, and now want to sell and go off and do something else," he says, "and very often they sell out to a bigger rival or a private equity house, and there will be an earn-out. That change in role can be quite challenging. They have been used to being the dominant, driving force in their company, and now the company might be taken in a different direction. That can be challenging for both sides."
Fellow corporate partner Ian Dobinson agrees. "There can be a conflict between meeting the financial targets of the earn-out and the wishes of the new owner, which may be more long-term."
Dobinson often finds himself looking at things from the vantage point of the acquirer, frequently a private equity provider.
"So much of the successful acquisition depends on the financial arrangements," Dobinson notes. "Quite often the founder will have given shares to the people around him, or made promises behind the scenes to 'see you right' when the deal is done, and so you suddenly have all these people working for the business who come into a chunk of money. Now, if you're the investor buying that business, how do you ensure that people remain motivated when they've just received a large amount of money?"
Money, of course, remains at the root of any entrepreneur's decision to sell, and in particular tax. Few people are happy giving the government a significant proportion of the profits of a sale where they feel they have put their blood, sweat and tears in over the years.
Hence Dobinson and Harrisingh recommend that entrepreneurs keep a keen eye on the availability of Entrepreneurs Relief – tax relief on Capital Gains Tax when selling your business, which can mean you pay as little as 10% on the money you make when you sell.
"Last year there was a feeling that the Chancellor had made this a bit too generous," says Dobinson, "and that was creating the wrong kind of incentive."
"We did think he was going to row back a bit," says Harrisingh, "but Brexit may have changed that. I suspect the new Chancellor is going to want to give the impression that Britain remains open for business."
