Deciding to exit a business is a significant moment that can be driven by various factors.
It could be for the pursuit of new opportunities, adapting to changing circumstances in the marketplace, or planning for a well-earned retirement.
Whether you’re a pioneering startup, a visionary entrepreneur, or a well-established business, choosing the right exit strategy is vital.
For some business owners, an exit strategy has been part of the business plan since day one. But if it hasn’t, it’s a wise move to know the options available so you’re prepared if the time should come.
There are several different types of exit strategy – from selling your stake or liquidating the business, to acquisition by another business or a management buyout.
Ideally, an exit strategy should limit losses and maximise personal profit when you leave. This is where enlisting the expertise of an accountant can be invaluable, with tailored financial guidance to ensure a smooth transition and maximise personal profit.
In this post, we’ll look at seven business exit strategies, to help you plan for the future.
1. Merger and Acquisition Exit Strategy (M&A Deals)
Mergers and acquisitions (M&A) are a promising option, especially for startups and entrepreneurs seeking growth.
This strategy involves selling your business to another company, enabling geographic expansion, competition elimination, and acquisition of valuable assets.
Key Questions
- Is the company profitable and cash generative, with a successful track record?
- Is the asking price reasonable?
- Is the company effectively managed?
- Is the right amount of ‘hurt money’ (extra funds to address risks and make the offer more appealing to the selling party) available?
Funding
Funding an M&A deal often necessitates a strategic blend of cash, stock, and sometimes debt.
Tax Implications
Navigating the tax implications of M&A deals requires expertise to ensure a tax-efficient structure.
- Business owners may face Capital Gains Tax (CGT) on the profit from the sale, with potential relief options like Business Asset Disposal Relief, formerly called Entrepreneurs’ Relief.
- Stamp Duty may apply for transactions involving land or property transfer.
- VAT implications may arise, especially for VAT-registered businesses, depending on the nature of the transaction.
- Tax on Employee Share Schemes may be triggered.
- Trading losses could be eligible for relief against the seller’s other income or gains.
Advantages
You can retain control over price negotiations and have the potential to enhance the selling price through strategic negotiations.
Disadvantages
The time-consuming and costly nature of M&A processes and the inherent risk of failure make it crucial to weigh the potential downsides.
2. Selling Your Stake to a Partner or Investor
Selling your stake to a trusted partner or investor can often offer a pathway to a smooth transition with minimal disruption.
However, there are numerous things that need to be taken into consideration to make this option a success for all involved.
Key Questions
- Is the buyer a strategic fit for the business?
- What is the buyer’s vision for the business post-acquisition?
- Are there any conflicts of interest that need to be addressed?
- How will the transaction impact existing employees and clients?
Funding
Funding this type of sale may involve a combination of buyer equity, external financing, or even seller financing.
Tax Implications
Understanding the tax consequences of selling a stake is crucial to ensure a tax-efficient deal.
- If the sale results in a profit, you may be liable for Capital Gains Tax on the capital gain. Business Asset Disposal Relief could provide a reduced rate.
- If part of the consideration is contingent on future earnings or milestones (earn-out), there may be specific tax implications, and care should be taken in valuing the deferred consideration.
- In some cases, selling to employees through an Employee Ownership Trust can have tax benefits.
- Depending on the structure of the sale, there could be income tax implications, especially if the consideration includes elements treated as income.
- Business Asset Disposal Relief might be available to reduce the CGT liability.
Advantages
There is business continuity while the transition is taking place. The buyer also has a vested interest in the long-term success of the business.
Disadvantages
Challenges in identifying a suitable buyer or investor and potential subjectivity in the sale impacting the asking price.
3. Family Succession
Family succession involves passing down the business within the family, a process that demands meticulous planning.
Key Questions
- Is the family member capable of managing the business effectively?
- How will the transition impact other family members not involved in the business?
- What are the legal and financial implications of the succession plan?
- Is there a succession plan in place for unforeseen circumstances?
Funding
Funding family succession may involve a mix of personal savings, loans, or structured payment plans. Expert financial advice can help optimise funding strategies.
Tax Implications
The transfer of ownership structure plays a significant role in tax implications, depending on the specific circumstances of the transfer.
- Family succession can have implications for Inheritance Tax. Business Property Relief might be available for relief on the transfer of certain business assets.
- Depending on the succession’s structure, there may be Capital Gains Tax implications. Business Asset Disposal Relief could be applicable if eligible.
- If the business is gifted or sold at less than market value, Gift Hold-Over Relief might be available, deferring the CGT liability until a future sale.
- Selling the business to an Employee Ownership Trust can have tax benefits, including potential CGT exemptions.
- Proper succession planning and will writing are crucial to ensure that the transfer aligns with the desired tax-efficient outcomes.
- Stamp Duty is generally not applicable to the transfer of shares if no consideration is payable, but could apply to the transfer of certain assets.
Advantages
A strong knowledge of the business within the family and a gradual transition into a leadership role are advantages.
Disadvantages
The potential absence of a capable family member and the risk of blurring professional and personal lines are critical drawbacks.
4. Aqui-hires
Acqui-hires involve selling a company primarily for its talent, ensuring a beneficial outcome for both the business owner and talented employees.
Key Questions
- Is the acquiring company a good cultural fit for the existing employees?
- How will the talents of the acquired employees be utilised post-acquisition?
- What retention strategies are in place to keep key employees on board?
- How will the acquisition impact the existing company’s culture?
Funding
Negotiations on the valuation of acquired talent shape the funding of an acquihire. Expert financial advice can assist in securing a fair deal.
Tax Implications
We would strongly suggest seeking professional guidance to ensure a smooth financial transition.
1. If the sale results in a profit, Capital Gains Tax may apply. Business Asset Disposal Relief could provide a reduced rate if eligible.
- If employees hold share options, there might be tax implications related to their involvement in the acqui-hire.
- Severance packages for employees affected by the acqui-hire can have tax consequences.
- Thorough due diligence is essential to identify and address any potential tax liabilities before completing the acqui-hire.
- Determining the fair value of the talent being acquired can impact the allocation of the purchase price and subsequent tax implications.
- Depending on the nature of the transaction, VAT implications may need to be considered.
Advantages
Strong negotiation power for talent acquisition and assurance of a more certain future for employees are compelling advantages.
Disadvantages
It can be difficult to find a buyer interested in acqui-hire and the acquisition process can be challenging and costly.
5. Management and Employee Buyouts
Empowering existing employees through management buyouts ensures a smooth transition, leveraging the familiarity of the current team.
Key Questions:
- Are there managers or employees interested and ready to step into leadership roles?
- How will the buyout affect existing company dynamics and culture?
- What financial arrangements are in place for the buyout?
- How will the handover process be managed to ensure business continuity?
Funding
Funding a management buyout may involve internal funds, external financing, or employee contributions. Expert financial advice can optimise funding strategies.
Tax Implications
The structure of the buyout influences tax implications:
- If the business owner sells to the management team or employees, Capital Gains Tax may apply on the profit from the sale. Business Asset Disposal Relief could provide a reduced rate if eligible.
- Selling to an Employee Ownership Trust can have tax advantages, including potential CGT exemptions.
- The funding structure of the buyout can impact the tax implications for both the seller and the management team or employees.
- If part of the consideration is contingent on future earnings or milestones (earn-out), it may have specific tax implications.
- Consideration should be given to any employee benefits, including share options, and their tax treatment.
- Proper succession planning is crucial to optimise the tax efficiency of the buyout and ensure a smooth transition.
Advantages
Trust in experienced individuals familiar with the business and a more straightforward handover process are significant advantages.
Disadvantages
The lack of interest or readiness among managers or employees and potential negative impacts on the business must be carefully considered.
6. IPO – Initial Public Offering
Taking a business public through an Initial Public Offering (IPO) is a complex but potentially lucrative strategy. An Initial Public Offering (IPO) is when a private company becomes publicly traded by offering its shares to the public for the first time.
Key Questions:
- Is the business financially robust and capable of meeting public market expectations?
- What are the regulatory requirements and associated costs of going public?
- How will the IPO impact current stakeholders, including employees and investors?
- What is the long-term strategic vision post-IPO?
Funding
Funding an IPO involves issuing shares to the public, with proceeds used for business expansion. Expert financial advice is crucial for a successful public offering.
Tax Implications
An Initial Public Offering (IPO) for a business exit can involve various considerations.
- If the company’s shares are sold as part of the IPO, capital gains may be subject to Capital Gains Tax. Business Asset Disposal Relief (BAR) could provide a reduced rate if eligible.
- If the company has employee share schemes, the IPO can trigger tax implications for employees participating in these schemes.
- Gains from share sales in an IPO may be subject to income tax, depending on the nature of the transaction.
- Thorough due diligence is essential to identify and address any potential tax liabilities before proceeding with an IPO.
- If the company has granted share options, the tax treatment of exercised options can vary.
- Depending on the nature of the IPO, VAT implications may need to be considered.
Advantages
The potential for substantial profits by offering shares to a wide pool of investors and the option to access public capital for business expansion are significant advantages.
Disadvantages
Ongoing scrutiny from stockholders, regulatory bodies, and the public, along with the complex, costly, and labour-intensive nature of the IPO process, make it a challenging strategy.
7. Last Resort: Liquidation or Bankruptcy
As a last resort, liquidation/bankruptcy involve closing the business, selling assets, and settling debts, providing a conclusive end. This could be a solvent liquidation designed to realise value from the company’s assets to distribute to the shareholders, or at the other end of the spectrum, a forced process due to insolvency.
Key Questions
– Is liquidation or bankruptcy the only viable option for the business?
– What assets will be sold, and how will the proceeds be distributed?
– What are the legal steps involved in filing for bankruptcy?
– How will the business owner’s personal finances be affected?
Funding
Funding for liquidation often comes from the sale of remaining assets. In bankruptcy, existing debts may be discharged, relieving the business owner of financial obligations.
Tax Implications
Tax implications can vary based on the liquidation and bankruptcy process.
- If the business has assets, the sale of these during liquidation may trigger Capital Gains Tax. Business Asset Disposal Relief (BAR) could apply if eligible.
- Any funds received by the business owner during liquidation may be subject to Income Tax.
- Outstanding employee claims such as redundancy payments may be treated as an expense during liquidation, potentially affecting the tax position.
- The treatment of debts and liabilities during liquidation can impact the tax consequences for both the business owner and creditors.
- VAT implications may arise depending on the nature of the assets and transactions involved in the liquidation.
- Any trading losses incurred by the business may be available for relief against the business owner’s other income or gains.
Advantages
A swift and conclusive end to the business, simpler and faster execution compared to other exit methods, and relief from business debts and responsibilities are key advantages.
Disadvantages
Not typically a high-value exit strategy, there is also the potential for severed ties with employees, partners and customers, and impaired ability to borrow credit in future business endeavours.
Final thoughts
Choosing the right exit strategy for your business requires careful consideration of financial, personal, and business goals.
Whether navigating the complexities of mergers and acquisitions, stake sales, family successions, acquihires, management buyouts, IPOs, or considering liquidation and bankruptcy as a last resort, using an accountant ensures you make informed and financially prudent decisions throughout the exit process.
Next steps
At CRM Accountants, our experienced team can assist you in devising an effective exit strategy for your business.
Whether you need guidance on structuring your business to optimise tax relief, or ensuring that your estate planning aligns with your business goals, we will provide tailored support that caters to your business’s unique needs.
Get in touch by filling out our contact form or give us a call at 01865 379272. We’re here to simplify your financial journey.
