Evaluating your exit options as a business owner is a serious and heartfelt task. It will likely bring on a series of mixed emotions, as this is likely to be a once-in-a-lifetime exit.
There are various exit options to consider, which will determine not only your future but that of your staff. There is no right or wrong answer, as one size does not fit all and depends on individual business circumstances.
However, a number of questions may help you determine the most appropriate exit route. Whilst the following list is not comprehensive, it should help indicate what may be the most suitable exit route for you and your business.
Popular Exit Options
Trade Sale
A trade sale is when a company is sold to another company (usually 100%) operating in the same or a similar industry.
It is not uncommon for an earnout to occur that requires the vendor to remain with the business. If the vendor is not a key contributor to the business, they can usually exit within 3 to 6 months.
There is a risk that if certain functions within the business are centralised, this can impact the future of current staff positions.
Employee Ownership Trust (EOT)
An Employee Ownership Trust (or EOT) is where the business is transferred to a trust, which holds the shares on behalf of the staff.
This option can be highly beneficial as it offers substantial long-term tax-free payments to staff. Additionally, the vendor can currently take all sale proceeds tax-free. An employee-ownership trust effectively ensures smooth business continuity, due to its nature as a stable and long-term ownership structure. This is a good exit option for business owners prioritising seamless succession planning.
Third-party funding or loan notes may be used to facilitate this type of transaction.
Management Buyout (MBO)
A management buyout is when a company’s management team purchases the business from its owners.
The management team may be expected to contribute between one- and two-years’ salary each. They may need to raise the money individually to cover all their costs and source their own adviser throughout the process.
The funding is either facilitated by banks, equity providers or vendor loans.
Vendor Initiated Management Buyout (VIMBO)
A vendor-initiated management buyout is where the vendor works closely with the management team, underwriting all the costs. Only one set of advisers is required to facilitate a sale to the management team.
The funding is either facilitated by banks, equity providers or vendor loans.
Private Equity (PE) Sale
A private equity sale is where some or all of the business is sold to an organisation that invests in multiple companies. The management team is sometimes given the opportunity to have a modest shareholding. Therefore, this is only usually suitable for reasonably sized organisations.
This type of sale is generally focused on an exit and large capital returns for the buyer. The acquiring organisation may allocate a non-executive director to the board.
What Do You Personally Prioritise?
The exit route you choose is a personal decision based on your individual goals and how these match your future vision for your business. You may want to consider which of the following is important to you:
- Releasing as much money as possible straight away – if so, consider a trade or private equity sale
- Leaving the business on day one of the new ownership, assuming the business is not reliant on you – if so, consider a trade or private equity sale
- Retaining the culture and values of the business – if so, consider an MBO, VIMBO or EOT
- Rewarding staff for years of service by giving them a stake in the new ownership – if so, consider an MBO, VIMBO or EOT
- You want to act quickly – if so, consider an EOT
- You want to see your legacy maintained – if so, consider an EOT
Considering Your Leadership Team
Preparing for leadership transition in business should be high on your list of priorities when considering your exit options. Without your leadership team, the business could not operate with any success. Therefore, it is natural that you would want to take the most feasible exit route that benefits them as much as possible. Consider the following:
- Do you have a complete and adequate team? If so, consider a PE sale, MBO, VIMBO, EOT or trade sale
- Do they have the ability to borrow personally up to 2 years’ salary? If so, consider an MBO or VIMBO
- Do they have a high-risk appetite? If so, consider an MBO or VIMBO
- Do they have a low-risk appetite? If so, consider an EOT or trade sale
- Do they wish to create a business with capital value to realise again at a future date? If so, consider an MBO or VIMBO
- Is your business very dependent on the management team? If so, consider all options
- Does the management team see the business as existing in the long term to benefit all staff? If so, consider an EOT
Want to Learn More?
To learn more about how fds can support you with any of the above exit options, please visit our services page or get in touch to discuss your matter directly with a team member.