Exploring exit options: Finding the right path for your business

As a business owner, deciding how and when to exit your business is one of the most significant decisions you will face. Whether you’re considering retirement, moving on to new ventures, or simply looking to realise the value of your efforts, understanding your exit options is crucial. The best approach will depend on your personal objectives, the nature of your business, and the legacy you wish to leave behind. This article explores several key exit strategies, including succession planning, open market sales, management buy-outs/buy-ins, as well as Employee Benefit Trusts (EBTs) and Employee Ownership Trusts (EOTs).

However you decide to exit your business, it is always advisable to instruct a reputable corporate lawyer with the knowledge and experience to provide incisive advice tailored to your business and goals.

1. Succession planning: Passing the reins to the next generation

Succession planning is a popular choice for family-owned businesses where the aim is to pass ownership and control to the next generation. This option allows the business to remain within the family, preserving its legacy and ensuring continuity.

Succession planning can be beneficial as it offers a smoother transition, often with less risk of disruption as the successors are typically familiar with the business. It also allows for long-term planning, as the current owner can gradually transfer responsibilities to the next generation whilst they are still in situ, enabling them to mentor their successor and oversee the transition.

However, family dynamics can complicate succession planning. It’s essential to ensure that the next generation is both willing and capable of taking over. Additionally, careful tax planning is required to mitigate inheritance and capital gains taxes.

A well-structured succession plan can overcome these challenges, by providing a clear path forward for your business and reducing some of the risks inherent in this type of exit strategy. Your lawyer can help you draft the clear legal documentation you need to facilitate your plan, which may include bespoke Shareholders’ Agreements, tailored Articles of Association, Family Charters, trust arrangements, Wills and Lasting Powers of Attorney (LPAs). Your legal team is there to assist in drafting these documents, ensuring a seamless transition that aligns with your long-term objectives.

2. Open market sale: Selling to an external buyer

An open market sale involves selling your business to an external buyer, which might be a competitor, a company looking to expand their business offering, a private equity or venture capital firm, or an individual buyer. This option is ideal for owners looking to exit entirely and realise the full market value of their business.

An open market sale can often yield the highest financial return, especially if your business is in a growing or lucrative market. It also provides a clean break, allowing the owner to step away from the business entirely.

However, findingthe right buyer can be tricky and appointing the right specialist to assist you in this process is key to maximising your return. The sale process will involve significant due diligence on the buyer’s behalf, so you must be prepared for every aspect of your business to be scrutinised, from financials to operations.

A successful open market sale requires thorough preparation of the business in the months and years running up to a sale. You must ensure that you have your house in order so as to avoid any last-minute price renegotiations or onerous liabilities in the sale agreement. A solicitor and your accountants can assist you in getting the business ready for sale in advance of taking it to market; this process should form part of your early preparation in the sale of your business. The sale transaction itself will generate significant transaction documents, as well as extensive due diligence requirements, so you will need the support of an expert legal team to guide you through the entire process, ensuring that your interests are protected at every stage.

3. Management buy-out (MBO) and management buy-in (MBI)

Management buy-outs and buy-ins involve selling the business to the existing management team (MBO) or an external management team (MBI). These options are often chosen when the current owner wants to exit, but the management team wishes to take over, or in situations where it may be difficult to find a third-party buyer for the business.

MBOs and MBIs provide leadership continuity, which can be reassuring for employees, customers and suppliers. The existing management team already understands the business, reducing the learning curve and ensuring a smoother transition.

On the other hand, financing the buy-out or buy-in can be challenging, especially for small or medium-sized businesses. The management team may need to secure external funding, which can complicate the process. The vendor is also commonly expected to accept terms that will see the sale consideration being paid out as deferred consideration over a period of time following completion, often based on an earn-out linked to ongoing business performance.

Ultimately, the success of any MBO or MBI hinges on clear legal agreements, particularly regarding the terms of the sale, financing arrangements and the division of ownership. Again, your legal team will be invaluable in drafting these agreements, ensuring they support a smooth transaction.

4. Employee Benefit Trusts (EBTs) and Employee Ownership Trusts (EOTs)

Employee Benefit Trusts (EBTs) and Employee Ownership Trusts (EOTs) are becoming increasingly popular options for business owners who wish to reward their employees and ensure the long-term stability of the business.

• Employee Benefit Trusts (EBTs): EBTs involve setting up a trust that holds shares in the business for the benefit of employees. This can be used as a mechanism for employee share schemes, providing a valuable retention incentive and aligning the interests of employees with the success of the business.
• Employee Ownership Trusts (EOTs): EOTs enable the transfer of ownership to employees via a trust, typically leading to a fully employee-owned business. This option can be attractive for owners who want to preserve the business’s ethos and ensure it remains independent.

Both EBTs and EOTs can help secure the future of the business by aligning employee interests with its success, potentially leading to increased motivation and productivity. They can also offer significant tax advantages, such as relief from Capital Gains Tax.

Legal expertise is vital to ensure the success of both options, however, as establishing and maintaining these trusts can be complex. Setting up EBTs or EOTs involves creating a trust deed, as well as a raft of further transaction documents, and ensuring compliance with legal requirements; as such, both options will require careful planning and ongoing legal and financial oversight.

Our team can assist with the legal framework, helping you structure these arrangements in a way that aligns with your goals and benefits your employees.

Conclusion

Choosing the right exit strategy is a crucial decision that will have a lasting impact on your business, its employees and your legacy. Whether you opt for succession planning, an open market sale, a management buy-out/buy-in or an employee ownership model, careful planning and expert legal advice are essential. At Attwaters Jameson Hill, we are here to guide you through each step of the process, ensuring that your exit is smooth, legally sound, and aligned with your personal and business goals.

Should you wish to discuss your thoughts on exit planning with an expert Corporate lawyer, please do give us a call on 0330 221 8855 or email enquiries@attwaters.co.uk and we’ll be delighted to help.