Types of exit strategy

What is the right exit option for you?

Before you are ready to exit your business, it is important to explore the exit options available to you.

It's worth thinking in depth about what you need from your exit in terms of your legacy, the future of the business, timing, money and any ongoing interest in the business you may want to keep. With these things in mind you can start to build an exit strategy to secure the best outcome for you.

The strategy should achieve a smooth exit from the point of view of you the owner, your family, your management team and your employees which minimises the impact on your trade, maximises shareholder value and allows you to create a tax efficient disposal.

For successful, healthy businesses, common types of exit strategies include:

Selling your business to a third party
Management Buyout (MBO)
Employee Ownership Trust (EOT)
Passing the business to a family member
An Initial Public Offering (IPO)

Exit options if your business can’t be sold is likely to involve a members voluntary liquidation

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 the businesses trade and assets/liabilities. A third-party sale allows you to 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. Not all third parties will attach the same value to your business and as such you will achieve best value selling to a party that has a real ‘strategic’ reason to buy your business and will therefore pay a premium for it.

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 an interest in the business if you think the sale will enhance the market position and value of the business.
Familiarity of your industry 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 effect on trading.
The sale may not be viewed positively by its people leaving a negative impact on team performance and morale which needs to be managed.

Management buyouts (MBO)

A management buyout can sometimes 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.
Initial discussions around the possibility of an MBO can incentivise management and provide continuity.
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 may be faster and there can often be more flexibility in the structure of the deal.
You may be able to plan your exit over several phases allowing you to remain in situ and have more time
to develop the team until your final exit.

Disadvantages of an MBO

The management team often have insufficient personal wealth to part fund the purchase.
The management team may struggle to raise sufficient external funding for the deal so funding may
well need to come from inside the business. Where the right criteria are present an MBO may well be funded by Private Equity.
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 lack of funding often means a higher level of deferred consideration is required, so sale proceeds will be spread over time increasing the risk of non-payment or other default.
The management team may struggle with the range of different skills required to lead and run the whole business.
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 to encourage their use.

Advantages of an EOT

The management and employee group are a “readymade buyer.”
Capital gains tax free (i.e. the exiting shareholders will receive proceeds in full with no tax deductions). Management information won’t be disclosed to external parties.
The sellers can be paid out of future profits over time.
You may retain up to 49% on a sale allowed for a phased exit over time.

Disadvantages of an EOT

The management team may prefer an MBO and may be demotivated.
External funding may be difficult to raise.
Lack of available funding or slow cash generation may mean a higher level of deferred consideration is required, which increases your risk.

Family succession

Passing your business onto family members can be an effective way to exit and allows the family to protect your legacy. However, family succession can be complicated if there are multiple family members, and it can also be emotive. However, for many owners, there may not be interest from family members to take on the business.

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.
You can mentor and prepare your successor before you exit.
It can be less disruptive and provide more continuity.
It can often be a more ‘friendly’ transaction with more flexibility in the structure of the deal.

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.
The process can be more emotive and may cause family issues.
Family members may not have the financial resource of a trade buyer.
Taking on debt to fund the exit may put extra strain on the business.
It may be harder to hand over the reins and decision making to a family member.

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

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 public investors to raise significant amounts of acquisition and expansion capital.
Companies that decide to go public usually benefit from increased publicity because this process exposes them to specialist investors, for example hedge funds, pension funds, and of course the public.
A public company often attracts higher calibre talent.

Disadvantages of an IPO

IPOs are expensive to undertake as they are complex and involve significant compliance issues requiring mainstream legal and financial advisors.
Maintaining a public company is also more expensive.
Public companies have additional legal, accounting, corporate governance, and marketing costs.

Members Voluntary Liquidation (MVL)

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

An MVL is the formal process of winding a company down, paying off its creditors and distributing any remaining assets to its shareholders. It is carried by an appointed licensed insolvency practitioner.