For small business owners, planning for an exit or succession is one of the most significant decisions they will make.
This may be driven by retirement, health issues, or a desire to move onto new ventures.
Here are some of the most common business exit and succession options that we regularly assist our clients to navigate – and their pros and cons.
Trade sale
A sale to a third party (such as a competitor, a bigger company looking to enter new markets, or a private investor), is often an attractive option for owners looking to exit.
Pros
- Relative to other options discussed here, a trade sale may offer the best prospect of generating a substantial financial return on exit.
- It may be possible for the owner to make a ‘clean break’, or at least be tied in for only a relatively short period after the sale.
- It may be possible to negotiate favourable terms, such as an earn-out.
Cons
- Finding the ‘right’ buyer can be a time-consuming process, and if a buyer cannot be found then the owner may have to look at other options.
- The valuation expectations of the owner may be challenged, and the negotiations may lead to a lower price than initially expected.
- It can be difficult for the owner to secure the ‘legacy’ of the business; post sale they will have limited or no control over the decisions and actions of the new owner.
Management buyout
A sale to one or more members of the existing management team (an MBO) can work very well in cases where there is a strong team with access to finance.
Sometimes the vendor themselves will finance the deal.
Pros
- An MBO generally promotes continuity within the business as the skills, knowledge and expertise of the existing management team are retained after the owner steps away.
- Relative to a trade sale, an MBO is perhaps less likely to be disruptive to the business. The due diligence process is also likely to be much less onerous compared to that in a trade sale.
Cons
- To achieve a successful MBO, deal financing considerations can drive complexity and cost.
- A successful MBO requires the right team in the right roles and there can be a significant lead time to get to the point where that team is in place.
Family succession
Passing a business onto family members is a popular option, particularly among very mature and established businesses of a certain scale and in certain sectors (e.g. farming).
Pros
- A succession within the family enables control to be maintained and can help preserve the legacy created by the current/ previous generations.
- Family successions can allow a more gradual handover to the next generation, helping to ensure the business can continue to benefit from the expertise and support of more senior members.
Cons
- Attempts to maintain a business within the family can be driven by emotional, as well as practical considerations. It’s important to be sure that potential successors have the interest and the capacity to take the business forward.
- As with all types of exits, family successions need to be structured carefully to avoid triggering unexpected tax liabilities.
Employee ownership
We are seeing a big increase in enquiries from our clients about using an Employee Ownership Trust (EOT) to pass a business into employee ownership.
This can be a great option, with many benefits for the vendors and for the employees.
It promotes long-term stability and employee engagement.
Pros
- The EOT regime is specifically designed to help preserves the culture and sustainability of the business, as well as promoting employee engagement.
- Vendors selling to an EOT are often motivated partly to preserve the legacy of the business and to help employees who have helped it along the way.
- Vendors are permitted to retain a minority stake in the company, should they wish (e.g. for sentimental reasons).
Cons
- Due to the requirement to meet the legislative conditions, exits involving an EOT can be somewhat complex and costly to set up, compared to some of the other options reviewed here.
- It is important to have the right buy-in from the employees; they will have a say in the governance of the company post completion, so it’s crucial to have a solid, committed team in place and clear succession plans.
- Typically, EOT deals involve the vendor staying on for a period. Some of the vendor’s consideration is normally deferred and paid out of the future profits of the company (but then this is sometimes the case with other types of exit, too).
The tax breaks for vendors are particularly attractive since, when structured correctly, they can sell a controlling stake in the company to the EOT for market value – with no taxable gain.
Liquidation
In some cases, a company might ultimately be liquidated if no buyer/ successor can be found, or in other circumstances where a sale is not an option (for example where sole proprietor/ employee simply wishes to retire and there is no future earnings potential for the business)
Need help?
We regularly advise our clients on all aspects of exit and succession, with a particular focus on structuring matters in a tax efficient way, advising on valuations, and dealing with tax clearances.
