As a business owner, it is important to plan for the future of your business; this should include having an exit strategy in place. A well thought out exit strategy should help you to maximise the value of your business and ensure a smooth transition to new ownership.
Choosing the right exit strategy depends on a variety of factors, including your goals for the business, your own financial situation, and your personal preferences. Working with a team of advisors can help you evaluate your options and make the best decision for you and your business.
There are a number of possible exit strategies you can consider. These include:
|Sale to a family member(s)||This applies where your objective is to keep the business in the family.You can often maintain more control over the commercial terms of the sale, including timetable and payment terms then in a third party sale. Often between family members there is more limited demand for contractual protection (warranties and indemnities) for the buyer or new owner, reducing your exposure to risk on the sale.It will be important to negotiate the key terms in advance, and in particular consider how your close relative(s) will fund the purchase of the business.|
|Trade Sales (at market value to a third party)||If your objective is to achieve the highest sale price for your business, this is often achieved by a trade sale.A downside can be the complexity and professional work often involved: due diligence is usually undertaken by the buyer, where you will be required to gather for the buyer as much information as possible about your business and commonly complex documentation is involved allocating risk through warranties and indemnities.|
|Management Buy Out (MBO)||If you have a strong management team then a sale of your business to the management team may be an achievable or desirable exit strategy. There are significant advantages to an MBO. In particular, less due diligence is normally required as the management team are often less likely to require extensive warranties, having knowledge of the operations of the business.The strength of your management team is critical to a proposed MBO being a success: most business owners will need to determine early on if their management team has the requisite knowledge and experience needed, and if the management team are capable of transitioning to becoming owners of the business.It is often the case that a management team will lack the required funding to acquire the business, and as a result typically deferred payments or debt financing is involved. You should be clear as to such terms early on with your management team.|
|Employee Ownership Trust (EOT)||An EOT involves setting up a trust through which the employees of a business owned by a company can indirectly acquire shares in the company.An added benefit of an EOT is that employees do not have to use their own funds to acquire the shares.The structure is suitable for many sectors and industries, notably being more prominent in professional services and construction.The structure is commonly recognised for its significant tax breaks for business owners and for incentivising employees to drive business performance and succession planning for the future.|
|Liquidation / Winding up (or gradual winding up)||A liquidation involves the closing of a business through the sale of all of its assets and distributing the net proceeds to the shareholders. The strategy is often used when a business cannot be sold through any other method.|
Preparing for sale
In order to prepare for an exit, we recommend a pre-sale legal health check to flush-out any issues that could concern a buyer. We have seen many deals fall though and face delays due to issues arising during the formal sale process.
A legal health check may involve reviewing:
- client/customer contracts and your terms of business, to ensure that they are favourable to you and are legally enforceable;
- corporate documents/structure. Surprisingly often, a business’s corporate records are incomplete or its statutory books are not updated following incorporation, which can lead to issues on a sale;
- intellectual property registrations, licences and rights. If a business is reliant on IP, buyers will want to be certain it is registered in the name of the business and properly documented;
- compliance with data protection rules;
- contracts of employment; and
- the terms of any lease or title to any premises, and any mortgage or security documentation.
For more information you can contact Mary Anne Fedeyko by email at MaryAnne.Fedeyko@tsplegal.com, or by telephone on 01206 574431 and ask for the Commercial Company Team. You can also read more about our legal health check service on our website https://www.tsplegal.com/service/corporate-and-commercial/business-health-check-service/.
THOMPSON SMITH AND PUXON
Disclaimer Please Read: Thompson Smith and Puxon does not provide accounting, tax or valuation advice. This document is not intended as, nor should it be relied upon as, legal advice. You should speak with a professional adviser for the specific advice that you require.