4 Ways to Exit Your Business

Despite the turbulent economic climate, the market is still very buoyant for business acquisitions and disposals.  Private Equity also has a healthy appetite for the right type of business.

As we move into the new year, we thought it useful to provide an overview of the typical methods of business sale and acquisition and to highlight a number of the advantages and practicalities around those routes.

1. Share Sale and Purchase

A share sale and purchase are when a buyer purchases most or all of the share capital in a company from existing shareholders.  The only assets that transfer in the transaction are the sale shares themselves; the company remains, and the buyer takes subject to any and all historic liabilities of the company as well as ownership of the legal entity itself.

A big benefit of share sales is that the sellers receive the sale proceeds directly, and this route can prove tax efficient for the sellers.

From the buyer’s perspective, there is danger in ensuring the financial and operational history of the company has been checked thoroughly for diligence and the share purchase agreement negotiated with appropriate warranties and indemnities to protect the buyer in respect of historic performance issues.  Consequently, share sales can take longer to negotiate and complete, the buyer is likely to insist on greater protections and the seller is unlikely to receive all of the consideration unconditionally and on completion of the transaction.

2. Asset Sale

Aside from a share sale, an asset sale is the most common way to sell a going concern. It entails selling certain assets and rights such as the benefit of customer contracts rather than purchasing the underlying entity. Unlike in a share sale, the buyer can pick and choose which assets and liabilities to purchase.

This provides a great deal of flexibility around which assets will form part of the deal, which can include intellectual property rights, goodwill, stock and contracts amongst others. As a result, asset sales can be favoured by the buyer as they are not acquiring the historic trading history of the business, but a disadvantage to the seller is that the underlying proceeds for the assets fall to the business selling which may well give rise to tax implications on extracting those sale proceeds and also leave the sellers with the shell of the entity to wrap up through a form of dissolution or insolvency.

An asset sale can also invoke certain employment law protections, these will necessitate specialist employment advice.

3. Management Buy-Out

A management buy-out (MBO) – (usually structured around a share sale) is when members of a company’s existing management team purchase some or all of that company. This can be funded by institutional investment, debt from the seller, cash from the buyers or a combination of all three.

Those financing MBOs look for viable businesses that are run by strong management teams. Institutional investors will generally want some input in the running of the company going forwards, usually with an eye to building the business and exiting for a profit within a finite period (usually five years).

MBOs are preferred by some owner-managers as they know the management team that will be purchasing their business and can be assured of their knowledge and commitment to its continued success. It is typically seen as a lower risk option with a simplified due diligence process due to the management team’s existing knowledge of the business operations.

However, an MBO is a fairly complex transaction and as with other forms of exit, requires specialist legal, financial and tax advice. They often require the buyers to raise all or some of the sale proceeds directly. Post completion, their management and ownership rights are usually subrogated in favour of any third-party debt provider until the business plan or exit event that they are looking to achieve has been completed on.

4. Employee-Ownership Trusts

Employee-ownership trusts (EOTs) are an increasingly popular method of exit.

Such transactions involve shareholders selling their shares to a trust, which holds the shares for the benefit of the company’s employees. The purchase price is fixed as fair value and usually comprises payment of surplus cash on completion with future profits being used to fund the balance over a period of time to o the sellers via the EOT.

The benefits of EOTs largely lie in providing owner managed business owners with the ability to sell their business at a time of their choosing without having to rely on trade acquisition.

Sellers under an EOT route may also benefit from the disposal being tax neutral and is often seen as a great way to provide succession for the benefit of the existing and future employees of the business.

At Clarkslegal we have considerable experience in assisting business owners through exits and acquisitions and EOT’s specifically.   We are proud to be a member of the Employee Ownership Association.

We are hosting a number of seminars and webinars over the next few months where you can meet our team and learn more about the process of sale or acquisitions, further details for which can be found HERE on our website.  You can also access our webinar library by clicking HERE for more information.