Ways for private limited company owners to exit their business

Exiting your business is a huge decision and the way in which you do so is equally important.  Deciding which method of exit will depend on a number of factors and qualified advice should always be sought in advance.

Business exits require early planning and even if you have been approached with an attractive purchase offer, there is a lot for you to think about before agreeing.  What is best for you, the business and your employees can vary significantly, so getting the right advice in advance will be crucial to help you make the right decision.

The most common methods of business exit are:

1. Sell the business assets or the shares;
2. Pass the business on to a family member;
3. A management buyout;
4. A management buy-in; or
5. Merge with another business.

There is also the option of liquidating the company which might be the only choice if you wish to exit the business but there is no viable purchaser or the business looks likely to become insolvent.

1. Selling the business

Crucially, you will want to ensure that you receive the best price for the business.

To start the process, you should focus on the key areas that add value to your business such as customer relationships and contracts or having a leading and influential management team.  Try to assess your business in the eyes of a buyer.

Next you will need to identify a prospective buyer, factoring-in whether the type of buyer is important to you.  For example, do you want the buyer to be in the same industry, or are you satisfied that someone may be making a purely commercial investment?  Perhaps consider whether you should engage an agent to find suitable buyers.

The right buyer could also hinge on whether you wish to retain any involvement in management, or whether the buyer requires you to be involved in a hand-over process.  You should decide on each of these points before commencing negotiations.  It will save you a lot of time further down the line.

You will need to engage with a solicitor once the sale has been agreed in principle, to deal with the sale process and coordinate matters generally.  At the outset, your solicitor will help gather all the relevant information about the business to disclose to the buyer.

You will also need tax advice on matters such as Capital Gains Tax and how best to structure the deal.

2. Pass the business on to a family member

This could be in the form of a gift to the family member, but with strings attached such as an earn-out provision.

The benefit of this approach is that you can select the person who you want to transfer the business to, and you can help prepare them over a long period of time before the planned exit.

If there has not been the opportunity to prepare for the role beforehand, you could complete the transfer over a transitional period to help build their knowledge of the business and prepare for the new role.

However, the disadvantage is that it can be complicated choosing the correct family member to take the lead on the business and you may be more emotionally invested in ensuring they succeed and hence not achieve a “clean break” from the business.

3. Management buy-out (MBO)

Here you would be selling the business to the existing management team.  If you have a very competent and strong management team, this will be an advantageous route as you will have the reassurance that the business will be in good hands.  Importantly, you should have open and transparent conversations with the management team to see if this is something they can agree to.

There are many ways in which this can be funded.  Some examples include:

• Outside investment, i.e. lending from the bank or venture capitalists;
• Loan notes, meaning the consideration is paid overtime; or
• The you continue to take a share of the profits until the purchase price has been paid in full.

How the buy-out is funded requires careful consideration and structuring, with input from your accountant and tax adviser.

4. Management buy-in (MBI)

This is where the business would be purchased by an external management team.  This is a good alternative if the current managers are unable, or are not in a position to, take over the company.  Another advantage is that the new management team could bring in qualities to fill any gaps in skills or qualifications.

The main difference between an MBO and MBI is the due diligence that will be required.  The external management team will most likely do a more detailed review of the company as they are not familiar with the day-to-day running of the business.  They may take a more sceptical view as they need to evaluate any risks involved.

5. Merge with another business

Merging with another business has the potential to be very successful as you can choose a target business with complementary strengths.  It is also an opportunity for the business to expand and grow.

However, the merger process can be quite timely and there is the chance that negotiations with the other business do not go to plan as there could be competing objectives.

The above is only an example of the most common route for exit and therefore before deciding, you must take independent qualified advice.  If you have any questions, or would like any guidance on the above, please contact our Corporate and Commercial team for more information.