A brief guide to business exiting strategies

Exiting a business is a significant milestone for any business owner. The reasons for leaving a business will depend on each individuals personal circumstances and goals, and nature of business. An exit could be triggered due to retirement, wanting to pursue new paths or ventures or a decision purely based on the rapidly changing market conditions. Whatever the reason, by having a clear and well thought out exit strategy in place, will ensure you maximise the value of your hard work, preserving your legacy, whilst ensuring a smooth transition into the next stages of your life.

In this article, we explore business exiting strategies commonly found in practice as well as alternative strategies to consider.

Planning ahead and why is it important?

Planning ahead for a business exit is crucial and every business owner looking to do so, must consider this for several reasons. Not only does planning ahead allow you to maximise your return on investment by strategically preparing the business for sale (or a transition), but it also provides sellers with greater control and flexibility over the timing and terms relating to an exit. This reduces the risk of being ‘forced’ into an unfavourable situation, where a seller would not have the opportunity to negotiate. By properly planning an exit it is likely that a seller will , minimise disruption to the business, customers and to employees, whilst leaving a positive lasting

FAQs – Common ways to exit a business

1. I want to sell my company to a third party – what ways can this be done by? – Share sale v. Asset Sale

In a share sale, the buyer acquires all of the seller’s shares in the target company, essentially taking over the entire business, including all of its assets and liabilities. The target company will otherwise remain in exactly the same shape as it was prior to the acquisition, but with the only difference being the change in ownership. From the outside, nothing to the target company would have changed and the day-to-day business runs in exactly the same way as it did previously.

In an asset sale, the buyer only purchases (or ‘cherry picks’) specific assets of the business (and sometimes liabilities if this is what has been negotiated), such as equipment, inventory, goodwill and intellectual property and the sellers will typically be left with any outstanding liabilities. Instead of transferring one asset (i.e., the shares in a share sale), each of the assets transferred in an asset sale must be transferred in accordance with the specific form of transfer required for that asset. For example, a conveyance or TR1 is required to transfer land and to transfer a contract with a third party, this must be transferred by assignment, novation or renegotiating the existing contract, depending on the terms of the existing contract and whether the intention is to transfer the benefit of the contract or the benefit and burden of it.

It is important to note that despite the flexibility of picking which assets to buy, the rights of the employees are protected under Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE 2006), and must transfer to the buyer as part of the asset sale, if certain provisions are met. TUPE 2006 is outside the scope of this article, but it must be noted parties cannot agree to exclude the operation of TUPE 2006 under English Law (Regulation 18)it is essential that both seller and buyer seek specialist employment advice during the sale process to ensure compliance with their respective obligations under TUPE 2006.

2. Is it possible for the management team to take ownership of my company? – Management Buy-out (MBO)

A management buy-out (MBO) is a transaction where the target company is acquired by some or all of its management team, usually through the vehicle of a newly incorporated company; this can be done by either a share or asset sale. The management team will usually seek external funding to fund the purchase and will typically draw up a business plan designed to attract investors via private equity providers or financing through debt (i.e., loans from lenders). Despite involvement of a third party, managers benefit from greater control over the business they work for and will be incentivised to perform. This provides for a smooth transition with minimal disruption to the business and the team’s expertise, knowledge and continuity within the business can help to increase the target company’s value, ultimately allowing you to exit the business with confidence.

3. Can some or all of my employees take ownership of my company? – Employee Ownership Trust (EOT)

Introduced in 2014, an Employee Ownership Trust (EOT) provides wider employee-ownership power, by creating a legal structure where a company’s shares are held by a trust, for the benefit of its employees. This means that employees indirectly own the company, even if they do not directly own any shares. The trust is therefore created to act on behalf of all employees, giving them a stake in the company’s profits which are then bought from the selling exiting shareholder(s). This not only provides greater motivation and enhance job security, this also offers tax benefits and financial incentives. For those looking to transition from exiting their company, this useful corporate structure allows the company to attract and retain key talent, without needing to look outside the parameters of the company.

4. As part of my exiting strategy, is it possible to collaborate with another company with a view to exiting the company? – Joint Ventures and Strategic Partnerships

A joint venture (JV) or strategic partnership are business arrangements where two (or more) parties collaborate for a mutual benefit, although differ in terms of structure and scope.

A joint venture (JV) is a formal business arrangement where two or more parties create a new, separate legal entity and share in the ownership of that new company to achieve a specific goal. For example, two companies collaborate to develop and manufacture a new product, sharing in both the costs and profits of that new product under the umbrella of a new company.

A strategic partnership is a less formal arrangement and involves two or more parties agreeing to cooperate in specific objectives whilst retaining its independence. Unlike a JV, the parties in a strategic partnership do not create a new company, but will continue to share resources, knowledge or technology where required and can be used shared between different sectors. For example, a tech company partners with a retail company to integrate its payment system into the retailer’s stores.

By looking to form a long-term alliance with another company in achieving mutual objectives, it can open up an alternative channel to exiting a company.

Alternative exiting strategies

1. Should I make an Initial Public Offering (IPO)?

Depending on the size and type of business you are running, you may consider offering your company to the public by making an initial public offering (IPO). This fundraising method is typically used by larger companies, where a company offers to sell its shares to the public for the first time (the offer). Using this strategy can generate substantial capital for you and the company allowing you to exit, whilst raising the profile of the business. On the other hand, an IPO is an expensive and complex process, requiring legal, financial and regulatory compliance guidance, as well as being under regular scrutiny of the regulatory bodies.

2. Should I give the company to my family? – Succession planning

You may feel it wouldn’t do justice if you sold your business to a third party buyer and may instead want to keep the business within your family unit instead. Before making this decision you will want to consider who would be the best person to take over and whether it is in the best interests of the business.

Succession planning involves transferring ownership to family members, in most cases to children, or to other relatives, ensuring continuation and preservation of the family legacy.  It can also involve a complex process, create family conflicts with the added risk of choosing the wrong person due to lack of interest or skills required to run that particular business.

Before making the decision, it is therefore important you first speak to your accountant or financial advisor about tax-efficient ways to do this.

What might work for someone else, may not work for you so it is vitally important you obtain the correct legal and financial advice before making a decision. At Clarkslegal, our specialists are well versed in advising owners of SMEs and owner-managed businesses on exiting their business. If you’re looking to start preparations, feel free to reach out to our corporate team and we would be happy to have an initial chat to understand your circumstances further.