Exit strategy: Selling your business vs family succession

Launching and successfully running a business takes commitment, motivation and not a little luck, as many of you will know. So the owners and managers of SMEs can be forgiven for concentrating on current trading, product development, staffing, sales growth and customer trends, rather than when and how they plan to eventually stop working in the business.

However, the reality is that having some idea of an exit strategy in place – even one as vague as knowing that you will eventually want to sell up, pass the business on to the next generation, or simply shut up shop and retire – can help you determine the commercial structure you set up to start with (for example, partnership or limited company), and the direction in which you develop your business.

The important thing is that it’s never too late to plan – although leaving things to the last minute, or making snap decisions over the future of your business, could prove very costly – so the sooner you can plan your exit strategy, the better.

Our recent research into the thoughts of 200 UK business leaders revealed that only 24% have an exit plan in place. Not only that but those that do have an exit plan also expect their revenue to grow more than those who don’t.

Selling your business: which option is best?

If you decide that the best route for you is a business sale, you are likely to be faced with two options – either management buyout or trade sale. Both are effective ways of selling, but which you opt for will often depend on the type of business you run, and the key aims you want to achieve from the sale (for example, is maximising proceeds the overriding aim, or are you looking to also protect the workforce after any sale?).

Management buyout or trade sale

Where a business is in a particularly niche sector, or its future success could depend significantly on existing management expertise, then a management buyout may be a strong option. However, the management team looking to complete the buyout are likely to need substantial finance, so a business with high capital expenditure needs and a greater risk profile is likely to be less attractive than one which can generate regular, positive cash flow.

By contrast, if your business has strong synergistic benefits to a potential buyer – increasing the value of their existing operations through vertical or horizontal integration – it will make a good trade sale.

Understanding the value

Whichever sale option you take, you will need to decide exactly what you are selling – shares or assets – and also make sure that the valuation reflects both the worth of your existing business, and its potential. There are significant tax and legal differences between a sale of assets and a sale of shares that make a big difference to the bottom line a vendor receives.

Valuations usually focus on three main elements; stand-alone value, management premium that reflects their future input, and synergistic value derived by merging businesses. These elements, and how they are treated, will vary depending on the sale. For example, the stand-alone value should be achieved for the vendor in a management buyout, but with little potential to share the management premium, and no synergistic premium; by contrast, in a trade sale the buyer may be willing to share the management and synergistic premiums.

Initial public offering (IPO)

One other sale option open to high-growth businesses – and, in the current climate, particularly those fast-expanding tech start-up companies – is a stock market flotation, officially known as an initial public offering (IPO). The process of issuing shares which can be traded on the stock market can be a costly one, with legal fees alone potentially running into hundreds of thousands of pounds; but for the right business, an IPO can be a very powerful and very lucrative option, enabling business owners to maximise the return on their investment, while if they wish, still retaining a financial stake in the success of the company’s future.

Whichever sale option is most suitable for you and your business, it’s clear that planning and sound advice is essential as early as possible, to ensure that the sale maximises value while minimising tax, costs and disruption.

Handing it to the family

However, for many business owners, it is family succession rather than a sale which is the long-term exit plan. There are an estimated 4.7 million family-owned business in the UK; some current business owners and managers are the latest in a long line of descendants to run the family firm, but others are hoping that the business they have launched themselves will, going forward, become part of the family trade and tradition.

But just because you’re planning to keep things in the family, doesn’t mean it will be a simple process. Other family members may not want to take over the reins, or may have a very different vision for the future of the business, while existing staff may feel they are being overlooked for someone whose only qualification is being a relative. There may be complex tax planning required to avoid significant tax burdens, and as a family business owner it can be difficult to step back entirely from running the business. Again, the key is to plan ahead, to communicate properly with family and staff, and to get professional advice as early as possible.

Of course, not every one wants a business to continue without them, and whether you’ve decided to make a clean break to pursue other interests, or you’re looking to work less or retire completely, winding up a business is always an option.

The process will depend largely on the structure of your business – for example, it may be very simple for a sole trader to wind up their business, but a bit more complicated to wind up a limited company or LLP, as assets will need to be disposed of, and any remaining value distributed among shareholders or partners.

Although a winding up process is likely to be less complex than any sort of sale or succession, it’s just as important for you as the business owner to carry out tax and estate planning, as well as pension provisions – so once again it’s essential and to get professional advice as early as possible.

This post was written by Strategic Corporate Finance Partner, Simon Blake. To find out more about how we can help you with selling your business, succession planning and associated tax issues, you can contact Simon by filling in the form below.