If you’re running an SME much of your time will be taken up with decisions about how to run a successful and profitable business. But what about your exit strategy? What do you want to happen to your business when you choose to leave, retire or exit for other reasons? A good business exit strategy should consider a wide range of financial and personal factors to help maximise value, reduce risk and ensure a smooth transition. So what do you need to think about?
Goals and timeline
Firstly think about why and when you want to exit. You may be planning your retirement, want to take on a new business or personal opportunity or are keen to pass the reins to family members or your management team. Consider your timeline for exit – whether it’s short or long term a plan can help you ensure that you and your business are in the best possible position for those next steps.
Value the business
It’s important to properly value your business. Consider financial performance, growth potential, market conditions, customer base, any intellectual property and brand value. Your accountant can help here. And make sure to regularly update the valuation as you approach any exit! Time the market if possible – better conditions can drive a higher valuation.
Exit options
You may have a clear plan for the next steps for your business or need time to evaluate and choose the best fit. Here are some of the most common options to consider:
- Selling to a third party – putting your business on the market is an option and you may attract interest from a competitor or larger player in your sector. A specialist firm may be able to help broker a deal too, especially if you’re exiting due to a merger or acquisition.
- Management buyout – your management team may want to buy all or part of the business. Again third party involvement may be needed to guide any deal through.
- Employee ownership – there are several ways to structure this. One option is an Employee Ownership Trust (EOT) where a controlling stake in the business is sold to a trust that benefits all employees. Staff don’t invest any money or hold shares directly, but they do receive a share of the company’s profits. Another common approach is the Enterprise Management Incentive (EMI) scheme. Under an EMI, selected employees are granted the option to buy shares at a fixed price, usually set on a specific date, exercised in the future. This gives them a direct financial interest in the company’s success, as the value of their shares increases if the business performs well.
- Passing to family members – in this case you may want to consider whether you continue in a non-executive role, especially if you’re passing the business onto junior family members.
- Liquidation – if some of these other options aren’t viable you may want to consider closing your business. Talk with your accountant about the tax implications – you may be able to access Business Asset Disposal Relief on any equity in the business and a lower tax bill of 10% rather than a Capital Gains Tax charge.
Prioritise your financial and tax planning
Whatever your path, it’s critical to understand the tax implications of each exit option. Work with your accountant and tax advisors to structure the deal tax-efficiently and plan for your personal financial security after any exit, especially when it comes to your retirement plans and other investments.
Exiting a business can be an emotional period, so do take time to think about whether you are ready to let go emotionally, and what might be next for you. There may be options where you can phase out your interests via earn-out options or non-executive director responsibilities.
To discuss any aspect of your business planning, including a business exit strategy, please contact our friendly Chichester based team.