For most entrepreneurs, there will come a time when they want to cash in on their hard work and sell their business, but unwary owners can miss out on receiving the maximum value for it.

When Kieran O’Neill set up video streaming Website HolyLemon.com in 2003 while taking his GCSEs, he little thought that four years later he would be in the US inking a deal to sell the site for $1.25 million [£619,000].

After refusing several offers for the business, which started off as a way for O’Neill to show animations to his friends, he was finally tempted when US giant Handheld Entertainment made a cash and shares offer.

Following the deal, O’Neill is now planning to use the money from the deal to invest in two new ventures he is working on, according to press reports.

O’Neill is by no means alone in selling out in 2007. With sustained growth in the economy – it has been on the rise since mid-2003, bar a few blips – many entrepreneurs have decided that the conditions are right to cash in on their hard work and sell their business.

While some, like O’Neill, have sold out to a larger player, which will allow the business to continue or accelerate its growth and enable him to fund new ventures, other entrepreneurs sell out to ensure a comfortable retirement.

But whatever the reason for selling up, there are several options to be considered, which generally include; a trade sale, a management buy-out or buy-in, selling to an investment firm, or passing it on to a family member.

While each option has its own merits and pitfalls entrepreneurs should be aware of the work involved in selling, from valuing the business – including tangible and intangible assets – through dealing with due diligence requests from interested parties to negotiating any warranties.

Exits are also becoming more complicated. For example, vendors increasingly need to decide if they want a complete exit from the business or just make a partial sale and retain some of their stake.

Partial exits are becoming increasingly popular among SME vendors, especially in smaller management buy-outs, where they effectively take the role of a private equity firm.

Instead of realising the full value of the business up-front, the vendor sells a portion of their stake to the MBO team, with an agreement for them to buy the rest later. Not only does this help a buy-out team that may have struggled to find the necessary finance to buy the business outright, it also gives the vendor an opportunity to make more money later, especially if the company performs well post-deal.

Failure to plan

Nevertheless, despite the rewards on offer – and the inevitability that an entrepreneur will sell up or pass the business on at some point – many still do not make adequate succession plans, which can ultimately cost them when they come to sell.

Indeed, one in three owner-managed businesses do not have a plan in place for when the business leader exits, retires or can no longer work, according to a report by investment firm NVM.

In addition, 43% of non owner-managed businesses ignore the issue, refusing to make plans because they cannot find a suitable successor. A further 38% do not acknowledge that succession planning is an issue.

This lack of preparation could mean vendors lose out when they exit because they cannot demonstrate sufficiently the ongoing sustainability of the business when they have left, especially if the vendor is selling to a private equity firm.

“Considering the importance that is placed on management it is vital that businesses demonstrate their contingency planning when the management itself is leaving,” said James Arrowsmith from NVM. “It is simply a matter of demonstrating there is new capacity to deliver the ongoing profitability of the business.”

A departing owner-manager with no or an inadequate successor makes buyers nervous and therefore likely to reduce their bid or not bid at all, according to NVM.

A possible solution is to bring in a replacement prior to a planned exit to work within the business on a consultancy level with the option to buy the business. “This can work well for vendors as they maintain control during the handover and know they are leaving the business in safe hands,” Arrowsmith said. “They are also more likely to realise the full value of the company when they exit.”