Planning your exit strategy
Having an exit strategy in place enables you to prepare for the future and gives direction to a business to ensure value is maximised, and a planned exit will always be preferable to one that is forced on you by circumstances. Mark Lupton of our specialist corporate and commercial law practice Beyond Corporate explains.
The uncertainty created from the political fallout of leaving the EU, set against the COVID-19 pandemic causing the UK economy to shrink at proportions not seen since records began over 300 years ago, has forced many business owners to reassess their plans, including their own exit strategies.
Having an exit strategy in place enables you to prepare for the future and gives direction to a business to ensure value is maximised. A planned exit will always be preferable to one that is forced on you by circumstances.
The most common types of exit for a business owner are:
Sale of the business
If your primary aim is to make a profit, retire or extract value to invest elsewhere, selling your business may be your best option, particularly if you are looking for a clean break.
Firstly, you’ll need to decide what exactly you are selling: the shares in the company, or the trade and assets (which is usually less tax-efficient).
Then, you’ll need to find a ready buyer. This could either be through a direct approach or going to market.
One factor to bear in mind when you sell shares in a company is that you will have to pay Capital Gains Tax (CGT) on the profits you make from the sale. There is speculation that the Chancellor will soon increase the current rates of CGT to help raise cash necessary to recoup the public costs arising as a result of the pandemic. This has partly resulted in an uptick in deal activity in the market with a number of business owners looking to sell before any changes come into effect.
Passing a business on to one or more of your relations is a tradition that many families manage successfully, and will often be dictated by the type of business operated and whether there is a suitable heir apparent who is able, and capable of taking over the reins.
It is often possible to extract some value for the outgoing business owner as part of the process of transferring the business to a family member.
In a management buy-out (MBO), the business is bought by an existing management team. This option is often overlooked as a viable exit option for business owners, due to the misconception that management need to have access to significant capital, but it is sometimes the quickest and most efficient way to exit your business, particularly if the team already knows the business inside out.
Careful planning, preparing the business for transition and early involvement of management will greatly improve the chances of a successful MBO transaction.
There are several funding sources and structures which can be accessed to achieve a successful MBO. In addition to the usual bank funding, a management team can often be backed through private equity or venture capital with the aim of growing the business and seeing a return for the investors over a relatively short space of time.
Employee ownership is where the employees of a business own all or most of the shares in the company. This form of business ownership is relatively new in its current form and rapidly growing in popularity as it offers a number of highly valuable benefits for businesses, their employees and the business owner looking at succession planning.
If you own a trading company, you can now sell some, or all, of your shares to an employee ownership trust (EOT) (subject to satisfying certain conditions) for full market value without incurring any capital gains tax liability in a way which also benefits your employees.
EOTs may provide a viable alternative to trade sales where a business has been unable to attract a viable buyer.
Winding down the business
Winding down a solvent business, or a members’ voluntary liquidation, is another common exit strategy, particularly for those hit hard by the COVID-19 crisis. If there is no obvious buyer or successor in your family or management team, or if the business has suffered losses and is unlikely to return to profitability, you may decide to close the business and return capital to shareholders before it becomes insolvent.
A liquidation has to be dealt with by a professional adviser, to make sure all the business’s liabilities are taken care of. Taxation, creditors, employees, pensions and property all need to be considered when winding a business down.
In what is seemingly an ever-changing economic climate, it is never too early to have a clear exit strategy. The best option for you will depend on a number of factors (some within or outside your control) and will be the one that suits your own goals and expectations.