6 Exit Planning Strategies for Your Business

If you are planning to leave your business, it is important to have the right exit strategy in place. Most people faced with this situation will think about selling to an investor or another business in the same sector, or perhaps a management buyout.

While these might be the right choice in some circumstances, these are not the only options. One alternative is selling your business to your employees via an Employee Ownership Trust (EOT). This is route is tax efficient, as it is exempt from Capital Gains Tax (CGT), provides a very flexible exit route on your own terms, and protects your business and employees into the future.

At RM2, we specialise in employee ownership, so it’s only natural that we think this is a great option for business owners seeking an exit. But it isn’t right for everyone, and it’s important that you make an informed decision about what to do with your company.

Below we have set out the main exit strategy options (including employee ownership!) to get you started.

If you just want to find out more about why employee ownership is a great option for exit planning, you can jump ahead to here.

1.  Selling to a third party or an investor

One of the first options most people tend to think of is selling their business to a third party, whether another individual or another business, including a private equity investor. This is a tried and tested route, and your advisors will be familiar with it, so on the face of it this approach should be reasonably straightforward.

However, there are potential downsides. While a business sale might seem straightforward, allowing you to “take your money and run”, the reality is that the process is likely to be long and complicated. There is no guarantee how much interest there will be in your business or what sale price you may actually be able to secure.

You will need to disclose sensitive business details as part of the sale, which always carries an element of risk, and there are typically weeks or months of negotiations to manage with the buyer. Sometimes, the sale will fall through at the last minute, which can be costly and disruptive.

In certain circumstances, particularly if a private equity firm is involved, the sellers may find themselves tied into the business for a set period after the sale, and it’s common for some of the payment to be subject to performance conditions.

Once ownership has been transferred, the new owners will have complete control of the business, which may result in restructuring and “streamlining” – which can often translate into redundancies and unwelcome changes to the company’s culture

It is also important to remember that CGT will be charged on the sale. This can significantly reduce the amount you receive.

2.  Selling your shares to your co-shareholders

If there are other shareholders in the business, you may be able to sell them your shares. Alternatively, you may wish to attract a new shareholder to take over your interest (provided your existing colleagues are happy for this to happen). In either case, this can help to provide continuity for the business and it may be faster to negotiate a sale to existing shareholders than an external investor.

You can run into problems, however, if your other shareholders aren’t willing to buy you out, or if there is significant disagreement as to the price you seek. If you have a shareholders’ agreement, there may be details that need careful review before you proceed.

You will also, again, likely incur CGT on your sale proceeds.

3.  Management buyout

Selling the business to its existing management team may be an ideal solution. This can protect the character of the business and its employees while being fairly simple and easy to arrange.

One common problem with management buyouts is that the management team may struggle to raise finance for the purchase. They may also lack the necessary experience to effectively run the business themselves. A successful management buyout, for these reasons, will usually require some long term planning.

Again, the issue of CGT must be considered.

4.  Handing over to a family member

For a family business, it may make sense to pass ownership to another family member. This keeps the business in the family and means you may be able to remain involved in an advisory capacity.

Potential problems with this include if there are no family members with sufficient interest or the necessary skills and experience to run the business effectively. The transfer may also attract CGT, depending on the circumstances.

5.  Winding up (Members’ Voluntary Liquidation)

If you can’t find a buyer, winding up your business may sometimes seem like the only option, and many business owners will take this route.

Of course, this is the end of the road for the business you’ve built up, and it means redundancy for your employees. It’s likely to deliver the lowest amount of value for the seller. CGT will usually apply (although in some cases the proceeds may be subject to income tax).

6.  Employee ownership for exit planning

Employee ownership means, as the name implies, that your employees will own the business. This is now usually achieved through an Employee Ownership Trust (EOT). The EOT holds the shares in the business for the benefit of all employees of the company.

You can, if you choose, retain up to 49% of the shares in the business. The purchase will normally be funded out of a mixture of cash and future company profits, or alternatively third-party financing can be arranged. You will typically receive an initial cash payment, and then receive payment in instalments over the next few years.

Why we think employee ownership is a great choice for exit planning

There are many advantages to placing your business into employee ownership when you are ready to move on. Some key benefits are:

• Get a guaranteed sale price – The price you receive will be set at a fair market value early in the process. This means you do not have to wait and see how much potential investors are willing to pay to find out how much you will get for your business.
• Minimal negotiation – Because you are not negotiating with a third party, the transaction process is not adversarial. An EOT transaction is almost always quicker, cheaper, and less stressful and disruptive than a traditional third party sale.
• No CGT – As long as the right conditions are met, you will not need to pay CGT when selling your business to its employees. This can significantly add to the value you receive.
• Choose a full or partial exit – This exit route is very flexible. Some sellers choose a 100% immediate exit; some will sell 100% of their shares, but remain as a director for a certain period to help manage the transition; some will only sell some of their shares, and continue to work in the business as previously, or in a reduced capacity.
• Protect your business and its employees – A transition in ownership can be very difficult for a business and the people who work for it. Employee ownership can help to ensure the business stays on the right track, keep your employees’ jobs safe and avoid damage to the business’s culture and reputation that you have built up.
• Keep your business independent – When you have spent years building a business, it is normal to have an emotional attachment to what you have created. Placing the business into employee ownership keeps it operating as an independent entity, rather than risking it being swallowed up by another business.

Find out more

Interested in selling your business to its employees? Read more about employee ownership.

Get expert help with employee ownership

If you would like to discuss how we can help you with placing your business into employee ownership, please email enquiries@rm2.co.uk and we can arrange a convenient time to have a call.