With a new Government in place and rumours swirling of a possible increase in Capital Gains Tax (CGT), business owners might feel a heightened sense of urgency to sell their enterprises. Under the current system, profits from the sale of business shares are taxed at a significantly lower rate, a benefit referred to as ‘Business Asset Disposal Relief’. For some, the potential CGT hike spurs the decision to sell, for others, it’s the allure of retirement or new ventures. Whatever your motivation, there are various strategies to facilitate your business exit, ranging from trade buyers to private equity, a management buyout or employee ownership. Let’s explore the various strategies for selling your business that best suit your needs and goals.
Exit Strategy Options
Each business owner’s journey is unique, influencing their choice of exit strategy. The right approach depends on your objectives, shareholder dynamics, and future aspirations. Below, we summarise the key options available, either individually or in combination:
Family Succession – Gifting shares to the next generation or selling to family members allows them to develop and build their experience within the business over time.
Family Inheritance – Shares in a private company can be inheritance tax-free, making passing on shares upon death a significant part of succession planning. This strategy avoids the need to sell now to secure cash, which might lead to substantial inheritance tax later.
The Managed Business – Transitioning from an owner-driven to a team-driven enterprise can free up significant time for owners while maintaining income. This approach can lead to an initial exit followed by a full sale. However, it requires investment in training the management team to ensure seamless succession and avoid leadership voids.
Management Buyouts (MBO) and Variants
- MBO: Management acquires the business, often with leveraged debt. This can create conflicts of interest, but the management’s familiarity with the business can lead to flexible deal structures and lighter due diligence.
- MBI: Similar to MBO but involves external management.
- VIMBO: Vendor-initiated MBO, where the vendor drives the process.
- BIMBO: External management or investment house-initiated buyout.
Employee Ownership Trust (EOT) – This involves selling the business to all employees via a trust, with valuation set by an independent financial analyst. It works well when management is capable but unwilling to fully take on personal debt required for a buyout.
Merger or Acquisition (M&A) – Securing a transaction through a trade sale or merger with a larger or similar company can maximise value by achieving synergies, economies of scale, and market disruption. A trade sale often secures the highest premium with a straightforward deal structure.
Financial Sale and Private Equity – Attractive to investors seeking returns, this approach involves selling to private equity houses that aim for fast growth. Sellers may retain a stake, benefiting from a secondary exit of a smaller but more valuable percentage of the shares.
Planned Partial Exit – This blended approach involves retaining a stake, either passively or actively, while working with a new team or private equity backing to grow the business to the next level.
Exit Strategies for Selling Your Business
The exit price and deal structure should align with shareholders’ aspirations, creating future options and increasing time wealth. Key considerations include:
- Present Value of Money – Money today is worth more than its equivalent tomorrow, due to opportunity value and inflation.
- Tax Efficiency – Sale proceeds on shares are usually more tax-effective than earning income. In the UK, ‘Business Asset Disposal Relief’ reduces CGT to 10% for qualifying shareholders.
- Certainty of Capital – Capital today is more certain than future income, allowing for reinvestment and compounding returns.
Seek Early Advice for the Best Outcome
The confidentiality of private company sales often shrouds the exit process in mystery, leading to misconceptions and value distortions. Selling a business is a critical financial decision requiring expert guidance to maximise value and choose the optimal exit strategy. Seek early advice to ensure a well-planned and successful business exit.
Whether you’re in the early stages of considering an exit or have already embarked on the journey, contact Partners Mark Crossfield (07780 957631) or Geoff Pinder (07717 874357) for a confidential discussion.