As a business owner, there will come a point when you’ll want to step back from your day to day business and eventually exit. Understanding the types of exit strategies available and the most suitable one for you is a crucial part of exit and succession planning.

A business exit strategy is a strategic plan that business owners use to leave or sell the business. The type of exit strategy you choose will depend on your personal and business circumstances.

In this blog,  we’ll cover the types of exit strategies that are open to you when you are succession planning  and we’ll explore which circumstances could suit you and your business.

What is an exit strategy?

Let’s start with the basics around what exactly we mean by an ‘exit strategy’. An exit strategy is a plan for how you will leave, exit or transfer ownership of your business. The purpose of an exit strategy is to plan the transition from the point of view of you the owner, your family, your management team and your employees. The objective is to plan for a smooth transition and exit, limit losses or maximise personal profit when you as an individual, or you and your business partners, exit the business.

For successful, healthy businesses, common types of exit strategies include selling your business to buyers who want to make a strategic acquisition or third party sale, a management buyout (MBO), passing the business onto a family member, or an initial public offering (IPO). If a business is in difficulty, then options such as liquidation or filing for bankruptcy may be appropriate.

Importance of an exit plan

All too often we see business owners leave planning their business exit strategies until the last minute, when they’ve made the decision to leave the business. What these business owners will not have appreciated is that there is a lot more work, thought and time needed for business exit planning than they expected.

There are so many benefits to planning your exit strategy early, with much of the process not only creating benefits on exit but also providing benefits whilst still running the business. Planning for exit encourages a business owner to set goals, make plans, protect and manage assets effectively, which in turn provides further stability for long-term growth. When you have a specific objective or goal in mind, an exit strategy can help maximise the value in your business.

The benefits of a comprehensive exit plan can include:

1. Developing your business in preparation for exit.
2. Determining, increasing and achieving maximum business value.
3. Deciding on the right type of exit to achieve your goals.
4. Finding and attracting the right investors or buyers.
5. Building and incentivising the right team.
6. Protecting your assets.
7. Saving money through proactive tax planning.
8. Smooth the transition.
9. Minimise stress.
10. Achieving the exit you want.

Business exit strategy options

There are a number of common exit strategies that you can consider. Each come with their own advantages and disadvantages and will depend on your own objectives and circumstances.

Family succession

Passing your business onto family members can be an effective way to ensure its future, continuity and legacy. However, sometimes, family succession can be complicated if there are multiple family members and it can also be emotive.

Advantages of family succession

• You are creating a family legacy.
• Family members may be more loyal to the business.
• Family wealth is maintained.
• You can mentor and prepare your successor before you exit.
• You may have more opportunity to retain some involvement.
• It can be less disruptive and provide more continuity.

Disadvantages of family succession

• Succession with multiple family members can lead to diluted management and a weaker business.
• There may be no suitable family members to take over.
• The process can be more emotional and may cause family issues.
• Your successor(s) may have different goals.

It’s important to be honest with yourself and your family. Consider other options if family succession won’t work.

Trade sale or third-party sale

Selling your business to a trade buyer or to private investors such as a Private Equity (PE) investor can include the sale of shares or the sale of trade and assets/liabilities. A third party sale means that you can withdraw from full time activity in the business, often after a handover period to allow a transition to let the new team take it forward.

Advantages of a third-party sale

• If managed and marketed correctly, you may get a higher price for your business.
• You can exit your business completely, after a handover or earn-out period.
• You may be offered a reduced but important role in the new business.
• You could retain shares if the sale enhances the market position and share value of the business.
• Familiarity of your sector may make the process of selling quicker and easier.
• If the buyer is known to customers and suppliers, the transition to the new business is less disruptive.

Disadvantages of a third-party sale

• The business may not operate efficiently during the sale process, having a negative short-term effect on trading.
• There may be a potential negative impact on team performance, morale and attendance.
• Customers may not like the potential buyer and leave, jeopardising the long-term future of the business.
• The sale may have a negative effect on company value depending on how the market sees the move.
• If the sale doesn’t go ahead, your company information has potentially been seen and used by a competitor.

Getting your business sale right is important. Only with thorough preparation can you maximise the value of your business and make it attractive to potential buyers.

Many owners accept ‘cold call’, or ‘flattering’ offers for their businesses without doing proper research or marketing their business to achieve a better price. In order to maximise value, you should consider potential buyers that might have a strategic advantage in acquiring your business.

Management buyouts (MBO)

Often a management buyout can be an ideal solution for the exiting business owner, especially if the management team are dealing with most of the day-to-day running of the business. You know and trust them, they know the company and can continue your legacy. But an MBO can have its own pitfalls. How do you know that an MBO is right for you and the future of your business?

Advantages of an MBO

• The likelihood of a successful completion can be far higher than in trade sales.
• Continuity of management.
• Management information won’t be disclosed to external parties and can remain confidential.
• Often the negotiations on the value of the business can be easier.
• The sale process can often be faster.
• You may be able to have more control and retain a minority stake in the business.

Disadvantages of an MBO

• The management team may struggle to raise sufficient external funding for the deal.
• The valuation may be lower than a trade sale as the management team won’t benefit from synergies and economies of scale that a trade buyer may.
• The management team may struggle with the range of different skills required to lead and run the whole business.
• The team may not have sufficient personal wealth to part fund the purchase.
• A lack of available funding may mean a higher level of deferred consideration is required, which increases your risk and all your money won’t be received on day one.
• If an MBO does not proceed, it may damage your relationship with your management team which may have a detrimental effect on the future of the business.

Employee Ownership Trusts (EOT)

The use of Employee Ownership Trusts as an exit strategy has increased significantly in recent years, particularly following the changes by the government to tax legislation in connection with Business Asset Disposal Relief (BADR).

Advantages of an EOT

• The Employees are a “readymade buyer.”
• Capital gains tax free (i.e. exiting shareholders will receive proceeds in full with no tax deductions).
• Management information won’t be disclosed to external parties and can remain confidential.
• Often the negotiations on the value of the business can be easier and sale process can be faster.
• You may be able to retain a minority stake in the business.

Disadvantages of an EOT

• The management team may prefer an MBO and could be demotivated.
• You may struggle to raise sufficient external funding for the deal.
• Lack of available funding or slow cash generation may mean a higher level of deferred consideration is required, which increases your risk.

Initial Public Offering (IPO)

An Initial Public Offering (IPO), is the process that companies go through when they decide to ‘go public’. They help companies raise money and investments through the selling of stock in the public market.

Advantages of an IPO

• Access to wealthy public investors who can help to raise capital.
• The IPO process also makes potential acquisition deals easier.
• Companies that decide to go public usually observe an increase in publicity because this process exposes them to specialist investors, for example hedge funds, pension funds, and of course the public.
• Once your company goes public it will attract a higher calibre of employee talent.

Disadvantages of an IPO

• IPOs are expensive to undertake as there is more planning and compliance needed, and other advisors involved.
• Maintaining a public company is also more expensive.
• Public companies have additional legal, accounting, corporate governance, and marketing costs.
• Allowing anyone to purchase a company’s shares can be distracting to management, as more corporate reporting and accountability is required.

Company liquidation

Ordinarily a company liquidation is associated with a company facing financial distress. However, it can be considered as an exit solution if there isn’t an option to sell the company.

Liquidation is the process of closing the company down and distributing its assets. It is a formal procedure where a limited company is closed down by an appointed licensed insolvency practitioner.

The company’s assets are sold (liquidated) and the revenue earnt from the sale of assets is redistributed amongst creditors and/or shareholders.

There may come a time when a company has come to the end of its life and the directors and shareholders wish to close the business. A liquidation facilitates the release of company assets and cash value without needing to find a buyer.

Tax planning considerations of exit strategies

The tax you pay on exit can have huge implications on how much money you exit with. Typically, the negotiations on exit are mainly around the business value, but considering the tax implications and structure are very important to understand your net proceeds in order to plan for life after exit. One of the key areas for planning your exit strategy well in advance is tax planning. All of the options above have different tax consequences, which could ultimately lead to additional costs or reduce the money you earn as you exit the business. If you plan, you can keep a significant proportion of your business sale proceeds. If exit planning doesn’t take place early enough, then a large amount of the proceeds may have to be paid to HMRC.

The main tax areas that you need to consider are:

• Capital Gains Tax
• Corporation Tax
• Business Asset Disposal Relief
• Inheritance Tax

Summary

After years of hard work and building your business, handing over the reins and leaving your business can be a daunting stage to go through. Whether you’re selling, passing onto family or considering an IPO, you need to make your plans in plenty of time.

Beware of trying to handle the entire process yourself. Exiting your business in the best way for you and your business and maximising your return on exit can be a long and distracting process. If you try and do it yourself, it could have a negative impact on your business performance and even your mental and physical wellbeing. Use professional advisors such as Barnes Roffe to support you from the very beginning of the process.

Barnes Roffe support business owners from all sectors throughout the whole exit planning process including:

• Succession planning advice and support
• Creating your exit strategy
• Advice on increasing business value
• Tax planning
• Family succession planning
• Business valuation
• Business sale
• Management buyout support
• Employee Ownership Trust
• Trusts and IHT planning

If you would like more help and advice with planning your exit strategy, then contact us today.