Exit Strategies

Exit Options

There are a number of ways of exiting or disposing of a business and business owners should consider the best option in line with their personal aims.

The principal options are:

• A trade sale
• A management buy out
• Family succession
• Management buy in
• Stock market flotation
• Merger
• Liquidation.

But first the business has to be ready for sale.

Planning ahead

Often owners of businesses can see years of investment and hard work ruined by failing to plan either adequately or at all for their exit. Ideally, exits should be planned as soon as possible, and a good rule of thumb is that you should start at least two years before you plan to go.

In cases where the intention is to sell the business after a certain period of time (i.e. up to five years after its creation), the exit should be factored into the start-up business plans.

Getting the business in the right shape to ensure a successful sale

The obvious first point is to identify possible buyers and work to develop your business into a condition that they will want.

Selling your business will be easier if you can:

• Demonstrate consecutive yearly increases in profitability
• Create a distinctive / niche / high-quality product or service
• Develop an innovative product or piece of intellectual property
• Build a strong customer base
• Recruit a high-quality team
• Maintain premises and assets in good condition
• Avoid excessive provisions
• Avoid unnecessary expenditure in the run up to the sale
• Maximise sales in the run up to the sale

The business structure and controls are important too

• Is your business properly structured to minimise tax?
• Are there assets in the business which need to be excluded, for example, property?
• Are there assets which need to be protected, for example intellectual property?
• Are the accounting and other controls robust?
• Are there quality assurance processes and controls in place?
• Are there proper HR procedures and policies in place e.g. are employee contracts in order?
• Are the statutory books, records and company documentation up to date?
• Are terms of trading suitable and secure?
• Are you aware of what warranties you are likely to be required to give?

Know your reason for selling and what your business is worth

A sale may have been part of the original start up plan, or objectives may have changed. Clarity of objective is essential and selling out of desperation is to be avoided.

Understand what you are selling - roughly only half of entrepreneurs planning to sell their business know how much it is worth.

The value of your business will be determined by a number of factors:

• its size
• future growth prospects
• diversification
• customer base
• profitability
• cash flow and financial management

Also it is important to neither undervalue your business nor overvalue it.

Selling shares or assets?

In a share sale the purchaser buys the shareholding in the company and so acquires all its assets and liabilities. An asset sale on the other hand allows the purchaser to "cherry pick" the particular assets they want to acquire, without acquiring all of the liabilities, (except for employees).

There are other key differences between the two types of transaction, including the form of documentation required for the transfer, tax and stamp duty implications, and in relation to the distribution of the purchase price.

Because a company pays Corporation Tax on the sale of the assets upon which the capital gain is made, and the sellers pay tax when the cash is taken out of the company, either by way of dividend or by liquidation of the company an asset sale creates a double tax burden for CGT. Therefore most sellers will prefer to sell by way of a share sale. Buyers on the other hand most often prefer the asset purchase route so careful negotiation is always required as is detailed advice to ensure the various pitfalls of any proposed course are spotted.

When can you leave?

It is not unusual for a purchaser to require the seller to continue to work in the business for a period to effect a transfer of customers and help the new owners learn the ropes. In addition if there were doubts about future profits at the time of sale the purchaser may require an earn-out clause to be incorporated into the deal and it then makes sense for the seller to help ensure maximum value is achieved.

Advice

Franklins Solicitors LLP are experienced in advising on all aspects of business acquisition and sale as well as in helping clients build up their business structures and procedures in such a way as to ensure the prospect of a sale can be enhanced. We work closely with the client's tax and financial advisors or can help in putting the right team together to provide overall guidance.

If you're looking to build your business, or have been approached to sell your company, then give us a call on 01908 660966 or 01604 828282. Alternatively you can fill out our online contact form. Our dedicated Business Services team are always on hand to find you the best deal!