Business exit strategy: Do you have one?
In almost 30 years of practising as a chartered accountant, I have found that most business owners have not thought about an ‘exit strategy’ for their business.
Having an exit strategy is crucial for any business owner, because let’s face it, we can’t work forever and for any business to continue, flourish and succeed, you must be realistic that one day you will need to step away and hand over the reins to someone else.
A business exit strategy, however hard that might be to consider, helps you to ensure a smooth and successful transition out of the business. It helps you to plan, maximise the value of your business, reduce risks and adapt to changing personal circumstances.
Why is a business exit strategy important?
As a business owner, having a business exit strategy is important for several reasons. If all the business owner does is turn off the lights when they want to stop trading and retire, then there is no value there. Realistically all the business owner has had over the years is a ‘lifestyle’ business.
By having a plan, it can help you to achieve your long-term goals, and to anticipate any potential issues and address them more proactively. It can also help to reduce stress levels!
A business exit strategy can ensure that you maximise the value of your business, either by preparing the company for sale or transitioning in another way. By preparing in advance, a business owner can ensure that the business is in the best possible position to attract potential buyers or investors. Failure to plan means you could potentially get a lot less for your business, or that you end up having to pay more tax as a result.
With a clear business exit strategy, a business owner can reduce their risk and it provides them with more clarity and certainty. It gives them peace of mind, knowing they have considered how the business exit will be structured, and how they can protect their investment and all their hard work.
The business may be your ‘baby’ and you want it to continue after you step back for your own satisfaction. It is likely you will want your loyal staff, customers, and suppliers to feel reassured that the business is in ‘safe hands.’ You may have family and want to hand your business onto the next generation, so you would need to think about how this would happen.
And it’s important to be realistic – personal circumstances change over time, such as retirement plans, health issues or changes to your personal priorities. These can all happen unexpectedly, so having a business exit strategy means you can transition out of the business when you need to, without the added pressure or worries about what might happen to the business.
How to exit your business – what are the main options?
There are several options you should consider when developing your business exit strategy including selling your business to a third party, a management buyout, or transferring to the next generation with a family succession.
Every business is different, and as a business owner, you would need to consider carefully which route is best for your exit from your business. Obviously, there are advantages and disadvantages to each one. We recommend that you start thinking about your business exit strategy at least three years before you want to transition away.
Selling your business to a third party
Selling your business to a third party needs careful consideration and planning. You will need to decide on the value of your business, identify potential buyers, prepare for the sale, negotiate the sale, and take account of the tax and legal implications.
Maximising the value of your business, improving profitability, and getting a valuation will be key and you should work with your accountant and other experienced professionals to ensure the sale is structured in the right way. Getting your house in order, setting timeframes, and preparing your financial information in a forensic way is what any potential buyer will be looking for.
Management buy-out (MBO)
A management buy-out (MBO) is where the business owner sells their business to the existing management team. This can be an effective, easier, and sensible route to go down, as existing managers will often have a good knowledge and strong experience of the business at large and your overall strategy. As a business owner, it might be more reassuring to know that your business is being left in the capable hands of your trusted team.
There are also management buy-ins (MBI) where a new external management team buys and takes over the business, as well as a buy-in management buy-out (BIMBO), a combination of new and existing managers.
Your business may well be a family-run enterprise and so handing your business onto the next generation to follow in your footsteps might be your preferred option for succession and your exit strategy. It may be important to keep the business in the family and you have a son, daughter, brother, sister, or another close relative waiting in the wings for you to hand the baton over to.
Obviously, as a business owner, you will want to make sure that your family can capably take on the business after you exit and perhaps more importantly, that they want to. Passing your business down to another member of the family can be a complex matter and may be fraught with added complications, so again, it’s important you seek professional advice from the outset.
Tax and legal implications of your business exit strategy
When planning your business exit strategy, there are a whole host of considerations to make from a legal and tax planning stand point.
In the UK, there are several tax implications to be aware of and while the following list is not exhaustive, your accountant will be able to provide you with the right guidance on what might or might not be applicable to selling your business, depending on your individual circumstances.
As the seller of the business, you may be subject to Capital Gains Tax (CGT) if you sell for more than its original cost, Stamp Duty Land Tax (SDLT) may be applicable, the business may be subject to Corporation Tax, VAT or if you sell as a sole trader, it could be liable to income tax. There may also be implications for Inheritance Tax (IHT), depending on the sale.
There may be certain tax reliefs available, such as Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs Relief, but again, getting professional advice from a qualified tax adviser can ensure that you plan your exit from the business and ensure you identify your tax obligations, and they are managed appropriately.
It’s also important to get the right legal advice when transferring your business – you will want to make sure that the transaction is completed in a legally sound way that has your best interests at heart and protects you from any future claims or possible default by the buyers.
Financing the exit deal
Clearly all these transactions will need to have detailed agreements in place with appropriate financial arrangements made – there are several options available through equity or debt financing.
Your financial adviser or lender will be able to give you more detailed information on money matters, including re-arranging finances to restructure the business, potential loans that could affect a deal, and more generally what is needed to finance an exit deal.
You could consider ‘deferred consideration’; this is essentially the payment structure for your business exit strategy. It means that a portion of the sale price is delayed – the buyer pays a certain amount up front and the remaining amount is paid in instalments over an agreed period. It might work for you, as a business owner, if you want to keep some level of control or involvement in the business during the transitional period and allows for more flexibility for both the buyer and seller.
Getting help with your business exit strategy
When deciding on your business exit strategy it is important that you work with experienced professionals throughout the process. They can help you to ensure the sale is structured in the best way to meet your goals and objectives and protect your interests. It is very important that your advisers collaborate and work closely together.