Business Performance Playbook - Planning a business exit strategy

A management buyout (MBO) occurs when a company's management team purchases some or all of its equity, often gaining full control of the business. While management typically leads the buyout, external investors are sometimes brought in to support long-term growth and strategic plans.

There are a variety of MBOs, including management buy-ins (MBIs), which are rarer and riskier than vendor-initiated MBOs (VIMBOs).

Planning a business exit with an MBO offers a smooth and efficient transition, as the existing management team already understand the business, it’s operations and its culture. This familiarity ensures continuity, minimising disruption for employees, customers and suppliers.

An MBO can offer significant tax efficiencies and flexible financial arrangements, making it an attractive option for both sellers and management.

Seek independent advice to evaluate the feasibility of an MBO. Explore various deal structures to understand their impact on you and the management team. Compare the tax benefits of an MBO with other options of exiting your business to find the best approach. Additionally, get guidance on funding future phases of the deal, including equity and debt options. Finally, outline the key stages of the MBO process and identify critical actions needed for a smooth transition and successful outcome.

A trade sale is the sale (or merger) of your business, in part or wholly to a competitor, another company or corporate group based either in the UK or overseas. This is a common business exit choice that involves legal, financial and structural steps to prepare your business for sale.

Exiting a business by selling to a trade buyer is one of the most straightforward and rewarding options, enabling business owners to realise their business’ full value immediately. Since these buyers are often familiar with the sector, the sale process becomes more efficient, allowing for a smoother transition.

A trade sale can unlock new opportunities, whether enabling you to pursue fresh business ventures, diversify investments, or enjoy more family time. The proceeds can significantly contribute to your retirement or other financial goals. If you prefer to stay involved, there may be a chance to carve out a role within the new organisation. A competitive bidding process with multiple buyers usually results in a higher sale price, as buyers can leverage synergies to enhance your business's value even further.

Trade sales can swiftly unlock your business’ full value, but they present challenges. Preparing extensive legal and financial documents can disrupt operations during buyer due diligence. The emotional impact of selling to a competitor can be significant, making it tough to let go. Additionally, you'll need to manage sensitive information and consider the effects on your staff, customers, and suppliers after the sale.

There are also potential tax implications of a trade sale that can significantly reduce the net proceeds received by the seller, affecting their financial outcome. Navigating these tax consequences can introduce complexities that complicate overall financial planning and decision-making. Always seek professional advice before committing to an exit strategy.

• Acquire a robust, independent valuation of the business and its future income.
• An audit of your financial systems to identify potential barriers should happen next. These can then be addressed or reflected in the sale structure or strategy.
• Consider the role (if any) you want to play post-sale.
• Identify resource to deliver the sale and solidify your timeframes.
• A full financial and investment plan should be drawn up, taking into account tax implications and future personal objectives.

Employee-owned businesses are wholly or partly owned by the employees that work for them, and three are generally three models available:

• Indirect employee ownership: shares are held collectively in an employee ownership trust (EOT) or employee benefit trust (EBT)
• Direct employee ownership: employees become individual shareholders (potentially facilitated by an EBT or EOT)
• Hybrid model: a combination of the above

Transferring ownership to employees can result in a smoother and faster transaction, as all parties involved are familiar with the new owners. This fosters loyalty and a sense of reward among employees, enhancing company culture, continuity, and growth. Profit-sharing can lead to a more engaged, higher-performing workforce, improving retention and aiding recruitment. Additionally, employee ownership can offer tax efficiencies; shares sold to an Employee Ownership Trust (EOT) can be exempt from Capital Gains Tax, provided certain conditions are met, making this an attractive option for many businesses.

Transitioning a business to employees involves several key considerations:

• Succession planning: Selecting the right successors is crucial. A well-developed succession plan ensures a smooth transition and minimises disruption to the business.
• Legal structure: The legal structure of the business may need to be changed to enable employee ownership.
• Financing: Consider financing options like seller financing, employee buyouts, or third-party financing.
• Valuation: Accurately determining the business's value is crucial; a professional appraiser may be needed.
• Tax implications: Be aware of potential tax implications such as capital gains tax, income tax, estate tax, and Employee Stock Ownership Plan (ESOP) benefits.
• Management and governance: Establish a management and governance framework that fosters employee ownership for long-term success.
• Business model evaluation: Understanding each business model option and its potential risks is crucial, as well as estimating the capital and income each could generate for the owners over time. Additionally, it’s important to be aware of any tax and legal implications and to address these early in the process.

The transition of part, or all, of your business to members of your family. And while it sounds simple enough on paper, this option still involves a number of financial and legal complexities. Not to mention, there is often an emotional aspect to this kind of transaction.

Careful succession planning protects the business from sudden or unexpected change. Training the next generation reduces senior recruitment costs and time. For family members, it offers unique career and financial opportunities.

Transferring a business to the next generation can ensure staff continuity, preserve brand integrity, and reassure stakeholders. It also helps maintain the business’ identity, traditions, and values, providing clarity and confidence to employees, investors, and customers.

Also, there may be an opportunity to create a continuous income stream during retirement.

Who will lead the company in the future? Does a family member have the skills, experience, or desire to manage the business? Assess if your current business structure suits the next generation. Restructuring may be needed to enhance efficiency or facilitate the transition.

There can also be tax implications, specifically around inheritance and gifting, as well as wider tax efficiencies to consider.