Directors’ Briefing Corporate finance

Planning your
exit from your
business
Many owner-managers put in a lifetime of Even if you are the sole shareholder and
hard work building their business only to manager of your business, analysing the
throw away some of the rewards by failing issues from these different perspectives
to consider properly how they will exit from can help you make the right choice. If you
the business — both financially and as a have a management team and multiple
manager. shareholders, agree objectives from the start
to help avoid damaging disputes.
It is vital to begin planning an exit at an early
stage if it is to be a success. This briefing 1.3 Be realistic.
is aimed primarily at businesses run by a
management team, but will also be useful to a • Many owner-managers have an inflated
sole trader with no employees. It covers: idea of the true value of their business.
If you cannot think of a good reason why
• Setting your objectives. someone would buy your business, you are
• Getting into shape for an exit. likely to struggle to sell it.
• The different exit routes available.
• Planning for trade sales, management buy- Most exits from small businesses are
outs and family succession. management buy-outs or family succession,
at a modest sale price.

1 Plan ahead

1.1 Start planning early for your exit.

• In an ideal world, you would have possible

exit routes in mind when you first set up the
business. But at the very least you should
start planning a few years ahead.
• Planning lets you get your business into the
best possible shape for an exit.
• Identify a particular year, level of sales or
other objective (eg if you plan to retire at
60, you might want to start considering
your exit at 55. You can always change
your plans later if you need to).

1.2 Think carefully about your aims. Consider:

• Your objectives as a shareholder (see 2).

• Your objectives for the business (see 3).
• Your objectives as a manager (see 4).

England Reviewed 01/04/09

Directors’ Briefing 2

2 Shareholder objectives you to remain involved in the business for

some time.
2.1 As a shareholder, you may want to exit to
gain financial security and minimise risks. • A float usually only provides a partial
management exit.
This is the major goal for many • Management buy-outs (MBOs) may include

“
shareholders who want to retire and need a rollover arrangements that require you to
pension. stay involved for a set period. Many small firms
• If you sell more than 50 per cent of a vainly hope a larger
• The sale must succeed, so you need more company, you will no longer have control competitor will buy
than one potential option, and you must over it — so it may be a bad idea to stay them when there is
be prepared to accept less than the best involved. no reason for that
achievable price. company to do so.
• You will probably prefer payment in cash, 4.2 You may want to carry on. To attract the
not the shares of a company buying you. interest of
This may not always be possible. Deals • You may earn a good living from a business competitors, a
often involve a combination of the two. You which would not be worth much without small company will
may also get a better theoretical price if you you. For example, consultancy businesses often need to be
are willing to accept shares. which can be reliant on an owner’s skills. successful enough

2.2 You may want to maximise the price you

get and accept the risk the exit may fail.
• Beware of holding on to the business for
too long. It may stagnate and lose value,
or you could be forced into exiting because
you have to, for a bad price.
Barrie Egan,
Business Link
”
to irritate them.

Northamptonshire
2.3 You may want to pass on the business
to a family member.
5 Get the basics right
2.4 You may prefer to sell it to a management
team you have worked closely with. Sound management over several years will add
value to your business and allow you to start an
exit relatively quickly when the time is right.
3 Company objectives
5.1 Aim for a year-on-year increase in profits.
Consider how you want the business to
develop, and if an exit would help you meet • Reducing profits to cut corporation tax
these goals. liabilities may make short-term sense, but it
could harm your business’ perceived value.
3.1 You may need capital for growth.

“
5.2 Make sure accounts are in order and
• For example, to allow you to expand your up to date, and give a true picture of the Good planning
product range or exploit your intellectual business. is essential if you
property more effectively. want to exit on your
• It pays to be ready for any due diligence own terms, from a
3.2 You may want to improve your market you may have to go through later. position of strength,
position by taking advantage of a better rather than being
distribution network. 5.3 Check you comply with employment, forced into it
health-and-safety and other legislation. because you need
3.3 You may want to enter new markets in the money or can
different sectors or in new countries. 5.4 Look to expand your range of customers. no longer continue
your management
3.4 You may want to draw on economies
of scale by becoming part of a larger
company.
• Over-reliance on a few key customers will
undermine your business’ value.

5.5 Aim to tie key customers, suppliers, staff

involvement.
Peter Gray,
Cavendish
”
Corporate Finance
3.5 You may want to give employees better and managers to long-term contracts.
job security or career development
prospects. 5.6 Protect your intellectual property rights.

5.7 Look at your business property.

4 Management objectives
5.8 Maximise relief for capital gains tax (CGT).
4.1 You may want to end your management
involvement. Some exit routes may require
Directors’ Briefing 3

• You may be able to claim entrepreneurs' businesses, such as lawyers and

relief, reducing the effective rate of CGT consultants with complementary strengths
from 18 per cent to 10 per cent on up to (eg geographic or sector coverage).
£1 million of gains. • Apart from getting your business into a
• Substantial holdings in investments good market position, it can be difficult to
could disqualify you from this relief. Avoid plan for a merger as you will not know how
investing spare cash in property or the your company might fit with a potential
stock market, or leaving it in the bank. suitor until the chance arises.

6.7 Liquidation. This may be the only option if

6 Possible exit routes you cannot find a buyer.

Consider the possible exit routes open to you. • You do not have to be in distress. Simply
These may include: sell your assets, surrender your lease and
stop trading.
6.1 Trade sale (see 7). • Businesses with limited earning potential
are likely to have net assets as a value
6.2 Management buy-out or MBO (see 8). benchmark.

6.3 Family succession (see 9).

7 Planning a trade sale
6.4 Management buy-in or MBI.
A trade sale is usually the best way to get a
• An external management team, funded by good financial exit from a small firm, particularly
venture capitalists, buys the business. if you have several competing buyers.
MBIs are increasingly rare, can be hard to
achieve and often result in failure. 7.1 Identify possible buyers who might
benefit from acquiring your business.
6.5 Stock-market flotation.
• Your market knowledge should mean you
• Few small businesses have the secure have a fair idea of who they might be.
earning streams and significant growth • A corporate finance adviser will have a
prospects needed to float successfully. database of possible buyers and may be
• The exit is partial. Selling your shares too able to spot less obvious ones prepared to
soon after floatation could be interpreted pay a premium price.
as a warning sign by other investors — and • Look in trade magazines and directories,
you may not be permitted to do so. and the financial press.

6.6 Merger. This will not really give you an exit The more possible buyers you can identify,
— though you may be able to retire later. the better the potential price is likely to be.

• Mergers are more common with people 7.2 Work to develop characteristics buyers will
really want. They may be seeking to:
Get the timing right
• Gain access to a new market. For example,
From a financial perspective, the best time to an overseas business might want to get a
exit is when you are in a position of strength. foothold in the UK.
• Get rid of a competitor.
A Aim to exit when profits are increasing • Get hold of a particular product, portfolio
and are likely to grow further. or contract you have. Will any of your
contracts be nullified by a change-of-
• Static profits are not a good sign. ownership clause in them?
• Get access to your staff and skills.
B Look for general confidence in the • Obtain synergies and cost-savings (eg
economy and particularly in your sector. through discounts or reduced overheads).
• Cross-sell their existing products or
C Consider the impact of any cycles or services to your customer base.
seasonal changes in your business.
7.3 Put a good management team in place.
• Do you have higher sales or fuller order
books at a particular time of year? • If the business is too reliant on your own
skills, its value to a trade buyer could
Directors’ Briefing 4

be damaged. Or you may have to stay same agenda and establish clear areas of Expert
involved longer than you might wish. responsibility from the start. contributors
• Your children will expect equal treatment.
but this does not mean they should all take Thanks to Brian
8 Planning an MBO an active role in the business. Hayden (Hayden
You could split the company’s share capital Associates, 07785
8.1 Sound out your management team. into two types: one with full voting rights 532266); Tim Jarvis
for children active in the business, the other (Hammonds, 0113
• Avoid raising their expectations too much. with restricted or no voting rights. 284 7000).

8.2 Train your management team. 9.2 Keep other employees fully informed.

• Their skills will be a key issue for venture • Involve long-serving staff in key decisions
capitalists or banks funding a deal. and in grooming your successor.

8.3 Put a value on the company. Your best staff are likely to be the first to
jump ship if things turn sour.
8.4 Give the management team time to raise
the money — they will probably have to 9.3 Discuss your future expectations with
approach banks and venture capitalists. your successor.

8.5 Talk to management about how you might • Aim to resolve any differences regarding the
structure any deal. aims of the business.
This will make it easier to step back when
• Consider allowing them to acquire the you retire — which can be difficult if you are
business in stages, buying part of it each relying on the business for a pension.
year for a number of years out of their
share of the profits. 9.4 Consider your tax position at the earliest
• You continue to take your own share of the possible stage.
profits until the deal is complete.
• Get a legal agreement committing the • You may be able to claim business-property
management to buy the whole business, so relief from inheritance tax on shares you
they cannot change their minds. give to your relatives. This should allow
Use this agreement to make sure you pay you to transfer shares held for at least two
tax on any capital gain at the end of each years free of inheritance tax, even if you do
year, rather than paying it all at the start. not live for more than seven years.
But you could lose some of this relief if your
company holds investments.
9 A family succession • You may be able to defer (hold over) CGT,
meaning your successor will pay it if and
Family successions can be fraught with when the gain is released in future.
problems and emotions. A third party — such • Putting some shares in a trust for your
as a non-executive director or business adviser children, from which you are excluded as a
— can be useful in providing impartial guidance beneficiary, may help you cut your tax bill.
and asking awkward questions.
9.5 Put an alternative plan in place in case
9.1 Identify a potential successor or family successors are not interested.
successors and plan their development.
© BHP Information
• Talk openly with possible successors. Solutions Ltd 2009.
Conduct discussions in the workplace ISSN 1369-1996. All
rights reserved. No
rather than at home. part of this publication
• There may be only one realistic candidate, may be reproduced or
but you still need to be sure this person has transmitted without the
written permission of the
the necessary skills and commitment. publisher. This publication
You might let them experience different is for general guidance
roles, or get them to work elsewhere. only. The publisher, expert
contributors and distributor
• It will be more difficult if there is more than disclaim all liability for
one possible successor. any errors or omissions.
Giving more than one person equal Consult your local business
support organisation or your
standing in the business could be a bad professional adviser for help
idea. If you do, make sure they share the and advice.

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Tel: 020 8672 6844, www.bhpinformationsolutions.co.uk