Understanding Your Exit Options

Understanding Your Exit Options

All business owners will need to exit their businesses at some point.  This can be a stressful and risky process, so business owners should understand the options open to them and have a strategy that maximises the chances of a positive exit outcome.

Three common options available to business owners looking to exit are a sale of the business to:

• a trade buyer;
• the company’s management team, known as a management buy-out (“MBO”); and
• an employee ownership trust (“EOT”), which is a trust set up for the benefit of the employees.

Sale to a trade buyer

This route can often lead to achieving the highest price on a sale, as the ‘right’ buyer will be able to gain strategic or synergistic benefits from the acquisition and be therefore willing to pay a higher price.  The other key advantage of a trade sale is that it will typically result in a higher proportion of the sale price being paid at the time of the sale, with therefore a lower proportion being paid on a deferred basis.

The trade sale option tends to take the longest of these routes to complete as a buyer needs to be identified and, once a deal is agreed, the due diligence process is generally far more extensive than the other two options highlighted here and the legal documents are typically far more onerous on the selling business owner as the trade buyer seeks to protect itself as it doesn’t know the business.

In the event of a sale of shares, the gain on the sale of a company is subject to capital gains tax, albeit if certain conditions are met then relief on the first £1m of the gain may be available under Business Asset Disposal Relief (formerly known as Entrepreneurs’ relief).

Sale to an MBO team

This option can ensure that the business’s independence and culture remains, rather than being amalgamated into a larger entity.  This can often be a quicker process than a trade sale as the buyer, i.e. the MBO team, is already known.  However, this option does require an MBO team that is substantially ready to take over the running of the company from the business owner.

Compared to a trade sale, sale price may not be as high as there are no strategic or synergistic benefits available to the MBO team. In addition, the proportion of the sale price that is paid at completion is limited to what the management team is able to raise by way of external debt and/or equity investment – along with any funds that the MBO team is able to personally invest. 

This can lead to a higher level of deferred consideration, which will be paid out of the business’s future profits.  The repayment of this deferred consideration will also typically sit behind the repayment of any debt that was raised as part of the sale, potentially further elongating the repayment timescale.

The gain on an MBO sale is treated in the same way as that of a trade sale.

Sale to an EOT

This option results in all employees having an interest in the company, by way of being beneficiaries of a trust, without the need to personally invest and also provides the ability to receive a tax-free bonus each year.  This can lead to superior business performance as employees know that they can benefit directly if the business does well.  Employee-owned businesses tend to also be better at recruiting and retaining talented, committed staff.

The business continues to be run by the company’s management team following the sale.  However, if the management team is not ready to take over, the business owner is able to stay on post sale and continue to run the company as a paid director and work with the management team to enable them to take over the running of the company at some point in the future.

This option requires an external valuation of the company to set the sale price, but this route is likely to have the highest level of deferred consideration as the only amounts available to be paid at completion will be those that can be raised by way of debt and what the company has by way of surplus cash on its balance sheet.  This will potentially result in the deferred consideration taking a longer time to be fully paid.

This process tends to be the quickest of these options as there is a ready buyer and a less onerous and intrusive due diligence and legal process.  In addition, selling to an EOT does not currently result in any capital gains tax being payable by the business owner, which could be a significant saving when compared to a sale to a trade buyer or an MBO team.

If you have any queries about these options or would like to discuss exit strategies with a member of the Azets corporate finance team, please do not hesitate to contact us.