By Adam Caplan, Partner

Whether you’re stepping away for retirement, health reasons, or a new adventure, every business exit strategy has its benefits and challenges.

However, the one you choose can be complicated and getting it wrong can result in one of two undesirable outcomes:

1. The business falls apart without you
2. You don’t get the return on investment you were looking for

Neither is great – or necessary – and you can certainly take steps to avoid these outcomes.

Below, I have listed some of the most common exit strategies and why you might want to consider using them.

Selling to a third party (a trade sale)

This option has strong financial potential.

A trade sale often offers the highest financial return, especially if your business is desirable to competitors, larger firms, or private investors.

In many cases, you can also negotiate terms that allow you to step away completely after the sale – or at least after a short transitional period.

Plus, with the right negotiation, you might secure extras like earn-out payments to boost your returns.

However, you’ll have to watch out for a few issues that can crop up:

• Finding the right buyer: The process can be time-consuming, and if no buyer materialises, you might have to rethink your plans.
• Price expectations: Your dream valuation could be challenged during negotiations, potentially lowering the final sale price.
• Loss of control: After the sale, the new owner calls the shots, and you may have to let go of the legacy you built.

Unfortunately, some of these things are outside of your control – especially the first one.

But there are strategies you can put in place to deal with the last two.

Selling to your management team (an MBO)

The upside of an MBO is that your management team already knows the business inside out, making for a smoother transition.

Also, compared to a trade sale, the process tends to involve less due diligence and disruption.

Having said that, there can be financing hurdles as securing the funds for an MBO can be complex and costly.

Success with an MBO also depends heavily on having a strong, cohesive team in place, which might require time and preparation.

Passing it down the family line

The big appeal of keeping it in the family is that it preserves the legacy you’ve built.

Passing the business to the next generation also allows you to maintain family control and continue the tradition.

You’ll also be able to remain involved during the transition, offering guidance and support to the new leaders.

There are some potential drawbacks, however, including:

• Family dynamics: Not everyone is cut out to run a business and passing it on without assessing interest and ability can create problems.
• Tax implications: If not structured carefully, this approach can trigger unexpected tax liabilities, which can erode the value of the transfer.

The best way to mitigate the tax liabilities is to speak to an accountant – the family dynamics, on the other hand, are up to you!

Employee ownership

I think employee ownership is gaining popularity due to the presence of employee ownership trusts (EOTs) which are designed to maintain the company’s values, engage employees, and ensure long-term stability.

Plus, if structured correctly, the sale of a controlling stake to an EOT can result in zero taxable gains for the seller (a big bonus for you).

This option also allows the business to stay true to its roots and rewards the employees who helped build it.

On the flip side, setting up an EOT can be more challenging than other exit strategies.

For this to work, employees need to buy into the model and actively participate in the company’s governance.

You’ll also need to be careful because the sale often involves phased payments from future profits, which may require the seller to stay on for a period.

Liquidation

You’d generally only use liquidation as a strategy when it’s the only way out.

For example, if a buyer or successor can’t be found, liquidation might be the only realistic option, particularly for sole proprietors.

Having said that, it is a straightforward way to close a business, but it also means the end of its legacy.

My thoughts

Exiting a business is a complex and emotional process, and there’s no one-size-fits-all solution.

I think it comes down to priorities, which you’ll need to work out well in advance:

Is your priority…

• Maximising financial returns?
• Preserving your legacy?
• Ensuring stability for your employees?
• Etc.

I always recommend you look at when you intend to make an exit and work back from there – sometimes as far as five or six years in advance.

During this preparation period, you can then weigh the pros and cons of each approach.

Most importantly, you should seek professional advice to navigate tax implications, valuations, and negotiations – because the last thing you want is to leave your exit to chance.

For advice on exiting a business, please get in touch with our team – we can help!