CHOOSING YOUR EXIT ROUTE

Taking the time to evaluate all of the exit routes available to you is vital. The most conventional route might not always be the most beneficial.

You need to consider what you want to achieve in the short, medium, and long term.

What Is Your
Main Motivation?

// Do you want the cash from your sale as quickly as possible?

// Do you want to secure the highest value possible?

// Do you want a swift exit?

// Do you want to secure income after your exit?

// Do you want to preserve the legacy of your business?

// Do you want to ensure the best outcomes for your team?

EXIT // OPTIONS

Deferred Management Buyout (MBO)

Employee Ownership
Trust (EOT)

TRADE SALE

A trade sale involves actively marketing your business to find the right buyer (more on this in chapter 7). The buyer may look for you to stay in the business for a period of time to ensure a smooth transition.

Trade buyers are generally inclined to buy companies with a clear market position, a solid reputation, growth potential or where they could significantly improve earnings.

A trade sale involves selling your company’s shares or trade and assets to an external buyer. The buyer is often another company operating in a similar sector.

Advantages and opportunities:

// Wide buyer audience.

There will always be profitable companies looking to acquire. When negotiating a price, it’s possible to create competitive tension between potential buyers.

// A clean exit.

A trade sale can potentially provide a clean exit from the business after an initial handover period.

// Lucrative and a lump sum payment.

When handled correctly, a trade sale could be very lucrative. You could receive a substantial lump sum cash payment, allowing you to personally de-risk.

// Retain shares or assets.

After the sale completes, it might be possible to retain some shares or assets and earn income from them. If the business continues to grow you could benefit financially in the long-term. You could also retain a business property as part of the agreement and use the rent as a source of income.

Drawbacks and challenges:

// Finding the right buyer.

You need to market your business in the right way. It can take time to find the best possible buyer, and this often needs specialist support.

// The right tax structure.

You may not be in a position to dictate the structure of the deal, which could trigger tax implications further down the line.

// Disruption and uncertainty.

Your teams could be negatively affected and this could impact staff retention. To negate this, total confidentiality is recommended until your plans have been finalised.

// No guarantee of business integration.

Integrating two businesses requires careful handling of operational, cultural, and strategic issues. To ensure a smooth

PRIVATE EQUITY

Private equity is comparable to ‘flipping a house’ in that investors will look to buy low, increase value, and then sell for a higher return.

Businesses with a strong organic growth potential are attractive to private equity firms. Investors often seek consistent growth, solid cash flow, and effective management.

A private equity sale involves majority or minority buyout of your company shares by an investor firm. Private equity firms aim to make your business more valuable with the view of generating a higher yield when it is sold in the future. They will potentially look to push overheads down, deploy experienced managers, and drive economies of scale.

Advantages and opportunities:

// Additional business expertise.

Business knowledge, industry connections, and experience could provide fresh momentum.

// Create the conditions for growth.

Private capital investment can be used to drive expansion or scale-up your existing business.

// Minimise business disruption.

The process could be less disruptive than other options. This is good for clients, employees, and business operations.

// High returns.

Private equity is a highly competitive market which, as a seller, can work to your benefit. Strategic buyers may pay a premium if it aligns with their plans.

// Efficient way of getting cash out.

Private equity can provide a quick and efficient way to cash out. This is due to experienced teams handling the buyout process.

Drawbacks and challenges:

// Sophisticated investors.

Most private equity firms require accurate accounts information due to strict financial reporting requirements. The due diligence process can be very thorough and intense.

// Ownership can become diluted.

You and the management team will no longer be the ones calling the shots. This can sometimes lead to conflict in the decision making process.

// Earnout structure can be complex.

If an earnout structure is in place, you may be expected to remain in the business to ensure the earnout is delivered.

Advice Tip

Find a private equity firm that shares your vision. In the same way you would look to get multiple bids from buyers in a trade sale, invite private equity firms to tender for the investment to better understand their goals.

FAMILY BASED SUCCESSION

Family succession carries strong emotion, so balancing sentiment and practicality is crucial.

You should consider your family’s readiness to step into ownership and leadership. To support this, practice high trust behaviours, involve them in current projects, and include your successors in the decision making process.

If you have children or grandchildren, you might consider passing on your legacy. It can be natural to want to see the next generation continue building what you’ve created.

Advantages and opportunities:

// Knowledge and practical experience.

If your children have worked in your business for some time they will know how to run it. They will also have existing relationships with your employees, suppliers, and clients.

// A smoother sales process.

There will be less pressure to position your business for sale. So, you could avoid a drawn out and expensive sales negotiation process.

// Trusted successors.

You know their capabilities. You also know that your family may be more aligned to your values and more committed to carrying on your legacy than a trade buyer.

// Brand consistency.

By keeping your business in the family, you can maintain your brand identity. This will help ensure that your customers receive a consistent experience.

Drawbacks and challenges:

// Technical and commercial capabilities.

Your successors must be dedicated and business-minded. Entrepreneurship isn’t for everyone. You may need to accept that some family members might not be the right successors for your business.

// Fraying emotional ties.

There’s no guarantee your family will carry on the business as you intended it to be. Over time, people may lose their emotional connection to the business, so it might be sold in the future.

// No lump-sum payment.

You may receive your remuneration in increments. Your payment could depend on the family business’s success after you leave if it’s agreed to be paid over time.

// Limited business experience.

An insular experience in one company can be a disadvantage in a competitive marketplace. A fresh perspective and wider experience can help your business stay ahead.

MANAGEMENT BUYOUT (MBO)

To implement a successful MBO, it’s crucial to have a motivated team, with the right mix of skills and a clear vision for the future of your business. Likewise, if your organisation is too small to attract an external buyer, an MBO could be a viable option.

A Management Buyout (MBO) is when your existing management team buy either the shares of your business or its trade and assets.

Advantages and opportunities:

// Tax benefits for you and your team.

You can structure the buyout in a way that reduces the tax burden on your team and yourself. You may be able to defer some taxes on the sale, by timing the transaction to happen in the following tax year. This allows you to receive some or all of the deferral before tax is due.

// Preserve your culture and legacy.

It’s likely you’ve invested time and energy into creating a culture that aligns with your vision. With your current team taking the reins of your business, an MBO can protect this culture. This can be reassuring for your internal and external stakeholders.

// Ensure confidentiality.

Team negotiations will remain internal and private. This means that your organisational information will remain within your business, achieving a greater degree of confidentiality.

// A smoother transition process.

Knowing the people on the other end of the negotiation table can make it easier to agree on the value of your business. As they work in the business the need for a lengthy due diligence process is reduced.

Drawbacks and challenges:

// The strength of your existing team.

Your team might not be ready or want to step up to the role of ownership.

// Funding the buyout.

An MBO requires financial input from your team which might not always be viable. Financing a buyout through management equity is rare. External funding will often be needed through external lenders or a private equity firm.

// The end value you achieve.

When a business is sold through a MBO, the price could be lower than in a trade sale. This might impact your future plans.

// If the sale doesn’t proceed.

The likelihood of completion is far greater than that of a trade sale. However, if an MBO doesn’t complete you could damage valued relationships with your current team. This could have a detrimental impact on your business.

DEFERRED MANAGEMENT BUYOUT (DMBO)

Once the acquisition completes, you would receive all the cash from the original business. This excludes a pre-agreed amount set aside for working capital. The remaining balance of your consideration is by loans notes, which can be paid over an extended period of time.

It may also be possible to raise additional funding against business assets, such as property, trade debtors or other fixed assets.

A DMBO is more likely to be appropriate for businesses with high cash balances, a strong asset base, few liabilities, and consistently high levels of income.

A Deferred Management Buyout (DMBO) involves setting up a new company to acquire the existing business. Your management team would then become the directors and shareholders of the new company.

Advantages and opportunities:

// No financial input from your team.

Unlike a traditional management buyout, a DMBO doesn’t require any financial input from your management team. Meaning a DMBO could offer an alternative if your team does not have the financial means to fund a buyout.

// Greater financial reward.

DMBOs can potentially offer greater financial rewards in comparison to traditional MBOs. Returns through a DMBO can be up to 30% higher than that of a traditional MBO.

// Remaining as a shareholder.

You would remain as a minority shareholder for a period of time. This would give you the ability to block decisions that might affect the new company’s ability to repay loan notes.

Drawbacks and challenges:

// HMRC clearance is required.

HMRC needs to approve your extended payment terms to ensure they are taxed correctly. This can add extra time to the exit process.

// Longer payment terms.

The buyer will pay the sale consideration over an extended period of time. This is one of the main drawbacks of a DMBO. So, factor in whether you would need to access funds from the sale straight away.

// Higher risk.

Payment through loan notes inevitably comes with more risk than traditional exit routes. You need to weigh up the risk versus the reward.

SHARE BUYBACK

A share buyback is an alternative option to a shareholder-to- shareholder purchase. Share buybacks offer potential tax benefits to consider in your succession planning.

A share buyback is when a company buys back its own shares, giving you an opportunity to exit. Using cash reserves, the business will pay a fee to regain shares held by others.

Advantages and opportunities:

// Capital treatment.

In some cases, payments made by a business for a share buyback are not considered a dividend. The money will be classified as a capital receipt and taxed as capital gains instead of income. A clearance from HMRC may be required to confirm this.

// Tax free return on investment for remaining shareholders.

When shares are bought back, the remaining shareholders will see a rise in their percentage of shares.

// Control dividend distributions.

An increase or decrease in dividend distributions can affect a company’s stock prices. Being able to increase or decrease the amount of shareholders within your business will help you control dividend contributions. This can help businesses create a positive impact on share price and demand.

Drawbacks and challenges:

// All ties are cut.

Once you have sold your shares back to the company, you won’t be able to become involved again in the future.

// Dependent on business reserves.

The option of buying back shares is only viable if your business has the profit reserves to afford the shares. If the business has insufficient profit reserves, this may not be an option.

AN EMPLOYEE OWNERSHIP TRUST (EOT)

The trust is set up above your company and all current shareholders sell more than half their shares to the trustee company.

This could be the right exit route for you if your main priority is to protect your legacy.

An Employee Ownership Trust (EOT) is an indirect form of employee ownership. It is a special type of benefit trust that holds the controlling stake of the business on behalf of all employees.

Advantages and opportunities:

// Tax benefits.

If you sell a controlling stake (more than 50%), you will make a complete capital gains tax saving on the sale of your shares. You can incentivise and reward your team with tax-free bonuses of up to £3,600 per year through the EOT.

// A flexible exit route.

If you’re looking for a clean exit, you can sell all of your shares to the trust and leave the business in the hands of the remaining directors. Or, if you’re looking for a partial-exit route, you’re not required to sell all your shares up front. Therefore, allowing you to take a gradual step back over time.

// No funding is needed to transfer ownership.

An EOT is funded by surplus cash from the trading company’s balance sheet. Future trading profits will be used to pay the remaining amount.

// Securing your legacy.

Your current team will know the ins and outs of your business, operations, and values. They are much more likely to preserve your legacy than a third party buyer.

Drawbacks and challenges:

// A lower sale price.

Although exiting via EOT will offer you a fair, market-value price, the price will likely be lower than an offer from an external buyer.

// Staggered payment structure.

The money that shareholders receive upfront is limited by the company’s cash reserves at the time of sale. This can be found on the balance sheet. The rest of the payment is paid over several years.

// Reliance on your team.

EOTs only work if your team is credible. The team needs to care about your business and its future success. If not, the future of your business could be stinted.