Insights

Exit strategy, succession planning, call it what you will; deciding what to do, and when, with your business to provide a secure future – possibly a retirement or the basis of a second career, is an issue all business owners face. And whether you are considering it because you feel the time is right to move on or step back now, or whether you're planning ahead; as with all important business decisions forewarned is forearmed.

Whilst, a decade ago, business purchasers were aplenty and the banks had no problem providing the funds required to sustain a hungry M&A market, the recession means that things are now rather different. It is therefore useful to consider a variety options you might not have thought about before; for instance, how much deferred consideration you can afford to take, or whether a ‘partial exit’ may be an attractive alternative.

Indefinitely deferred consideration?

When selling in the good old days, many companies achieved a high goodwill value based on historic profits, and although in an ideal world most sellers preferred the total sale price to be paid in cash on completion, they regularly accepted a slightly lower payment initially and could also look forward to future lump sums paid at intervals in the form of deferred consideration.

Now, typically, the initial payment received on the sale of a company is far less, mainly because the borrowings available to the buyer are less, with a higher balance of the sale proceeds being payable in the future based on the future profits of the company (over which the seller typically has little, if any control). And of course, whilst the level of future profits, and hence the return on those profits is a concern, in the current economic climate, you also need to be sure your buyer is going to be around to actually make the payments.  This is a very real issue today as future profits may be vulnerable if, for example, a major client goes out of business or indeed the buyer himself runs into financial difficulties.

If these issues are holding you back from a trade sale, then you might want to consider other alternatives that will give you the outcome you need without unnecessary risk and stress. These outcomes however require forward planning.

Partial exit might offer a win-win?

A partial business exit can be very attractive. It can bring new blood into the organisation whilst allowing you to take a back seat, explore other interests and ideally, enjoy some of the wealth you have generated. It can enable you to take part cash consideration and continue to enjoy a (reduced) level of income from the business – perhaps for helping out on a part time basis, helping with marketing or a smooth customer transition.

The key thing to bear in mind if you choose to take this route is the importance of ensuring continuity within the company both in terms of reassuring the current employees that your commitment is as high as ever and also by making sure that the team you bring in, whether through an MBO or entirely new blood, is up to the job and the process is managed as carefully and diligently as possible. It might also be an idea to retain a reasonable shareholding at the outset in order to reassure colleagues that you are not immediately diluting your own power too much.

Partial exit can give you the liquidity you need and offer a more flexible way to fund your lifestyle.

In order to decide on the best balance, you will need to consider the following:

1. How much time do you want to commit to the business after the sale? Work this out early so everyone involved knows what to expect - including you.

2. Your retirement is apt to go on a bit as we're all living longer, so do the maths and make sure you'll have sufficient income for your needs and those of your dependents.

If you are considering an external investor to finance a partial exit, one risk is the possibility that the dynamics of the business may change too abruptly.  This can occur for instance if that investor is to be involved with actively running the company and for example, wants to exit in the medium term, having seen a return on his investment. Find a partner who shares your core values and has a good cultural fit with the business and who can take it to the next level while you enjoy some time to rest and relax.

Tax planning opportunities

Depending on how your company is structured and the nature of what is being sold, HMRC will either view the sale proceeds as personal income or capital gains, or a mixture of both, with the latter being taxed at a lower rate. Get tax planning advice and ensure you consider all aspects for you and your team, including entrepreneurs’ relief, gift relief, EIS relief and business property relief.

Grooming your team

If you go down the MBO route, an experienced and balanced team is critical, not just to the funding of the deal but to secure the future success of the business (and of course your future income!). No matter what role you intend to have after the sale, you must analyse the quality and balance of the team. Its skill-set should cover all key aspects of the business including sales, finance, marketing and IT. By ensuring that you groom the right team for the job well in advance and pass the business on to a robust and experienced line up, you are managing part of the risk associated with giving up control and putting your company in the best possible position for future success, hopefully enabling you to enjoy your retirement, or semi retirement without cause for concern.

So whether you sell up completely or partially to existing employees, agree a merger with a competitor or get an outside investor interested, it always pays to be aware of the options available well in advance.

Lesley Stalker is head of tax at RJP, contact her at las@rjp.co.uk

This blog has also been published by Real Business