When considering exit options, business owners should take time away from the business to recharge and gain a fresh perspective on the position of their company. It is not uncommon for an owner-manager to return from vacation with a different outlook on their business and contemplate the idea of selling their company or at least considering exit options.
It is recommended that you carefully consider the pros and cons of each exit option so you can make a firm decision about what works best for you and your company. While there are several exit options to consider, we are specifically going to look at the pros and cons of some of the most common, which include a trade sale, private equity (PE) sale, management buyout (MBO), and employee ownership trust (EOT).
Preparing for leadership transition in business is no small feat, but by understanding different exit routes, you can make an informed decision that aligns with certain goals and aspirations.
Exit Option: Trade Sale
A trade sale involves selling the business to another company within the same or a related industry. Here are the key advantages and disadvantages to consider:
Pros of a Trade Sale:
- Potential for higher valuation: Strategic buyers may be willing to pay a premium due to synergies and growth opportunities.
- Faster transaction process: Established buyers understand the industry, enabling a quicker due diligence process and closing.
Cons of a Trade Sale:
- Loss of control: Once the business changes hands, the owner relinquishes control over its future direction.
- Cultural misalignment: Integration challenges may arise if the buyer’s values and culture do not align with the existing business.
Exit Option: Private Equity (PE) Sale
A private equity sale involves selling the business to a private equity firm. Consider the following pros and cons:
Pros of a Private Equity Sale:
- Capital infusion and growth support: Private equity firms often provide financial resources, expertise, and operational guidance to fuel business expansion.
- Partial exit with continued involvement: Owners can sell a portion of their equity while remaining involved in the business, benefitting from potential upside.
Cons of a Private Equity Sale:
- Reduced ownership and control: Private equity firms typically seek majority ownership, and even if they don’t, they have apparent control, which can be difficult for the original owner.
- Pressure for short-term returns: PE firms often have a predefined exit timeline, which may lead to a focus on short-term profitability over long-term sustainability.
Management Buyout (MBO)
An MBO involves selling the business to the existing management team.
Pros of a Management Buyout:
- Continuity and familiarity: The management team is already familiar with the business, its operations, and its culture.
- Smooth transition: An MBO can provide stability and continuity for employees, customers, and suppliers.
Cons of a Management Buyout:
- Financing challenges: Management teams may face difficulties in securing the necessary funding for the buyout, potentially leading to complex deal structures.
- Limited access to external expertise: Without external investors, the MBO team may lack resources and industry connections to drive significant growth.
Employee Ownership Trust (EOT)
An EOT involves selling the business to a trust set up for the benefit of employees. There are also considerable tax benefits to not only the shareholders but also employees.
Pros of an Employee Ownership Trust:
- Employee motivation and engagement: Employees become more invested in the company’s success, leading to improved morale and productivity.
- Tax advantages: In the UK, the vendor pays zero capital gains tax. Members of the Trust (employees) can also receive tax-free benefits per annum, at the Trust’s discretion.
- Completion time: This process is generally quicker than a traditional trade sale and could be completed in a matter of months.
- Financing considerations: Arranging the necessary funding for an EOT may require careful planning and financial support.
- Limited liquidity for the selling owner: Depending on the structure, the selling owner may experience limited immediate liquidity compared to other sale options.
Cons of an Employee Ownership Trust:
- Financing considerations: Arranging the necessary funding for an EOT may require careful planning and financial support.
- Limited liquidity for the selling owner: Depending on the structure, the selling owner may experience limited immediate liquidity compared to other sale options.
Conclusion
Deciding to sell a business is a significant decision that warrants careful consideration. If you are considering selling your business and are still unclear on your preferred exit option, a feasibility study report may provide more clarity – learn more here or get in touch to discuss your position and how we may be able to help.