Exit Strategy, Business Owner

An exit strategy is the preparation made by a business owner to leave their company on a permanent or semi-permanent basis. Departure from a business is normally followed by succession (passing the business onto a family member), a disposal (through a sale or a merger), or the permanent closure of the company.


Succession Planning And The Protection Of Value

A succession-focused exit strategy is about the protection of value. After working on your business for many years, maintaining the value and the viability of the company you’ve built up is important for both financial and personal reasons.

Many businesses are family-owned and -managed businesses. The hope for many exiting entrepreneurs is that the younger members of their family will lead the company eventually.

Once you have resolved that you do want to pass your business on to family members, you then need to plan how to do it. You can never start to soon in your preparation but we would advice that a handover period takes a minimum of 18 months to complete.

You need to consider your own role in the business – if you want one. If you want to no longer be involved in the decision-making process, you need to plan which family member will do what and provide them with the appropriate training and mentorship on their new responsibilities.

If you still want to be involved but at an arm’s length, you and other family members need to know whether your pronouncements are either advisory or binding on the company. In other words, are you going to be a backseat passenger reading out the directions the driver has given you or are you going to insist that your own route is taken regardless of the feelings and knowledge of the driver?

You’ll also need to consider whether you still wish to draw an income from the business and how much. If you take out too much, this could bring about negative consequences for both your company cash flow and your successors’ ability to pay themselves more in the future. If you take out too little, what has the point been in working for so many decades only to be a poor retiree?

Other aspects to consider could include:

  • leaving your company on your own schedule
  • choosing a strategic direction for your company before you leave
  • removing entirely or mitigating any capital gains tax liability
  • inheritance tax considerations
  • ensuring jobs to your current employees

In many ways, succession planning is the most complicated and emotionally-fraught exit you can choose because of the need to preserve the valuable relationships you have with the people who will in charge of the company you’ve worked so hard to build.


How To Exit A Business By Selling

There are two main ways to exit via the transfer of company shares, namely:

  • mergers – a merger usually brings your company and another together within one new organisation (a NewCo). You’ll have to negotiate your level of active involvement in the NewCo, any ongoing income you can drawdown, and consideration for the value of the shares you’ll be “selling”.
  • acquisition – your business is sold to another company, potentially a private equity firm or to another firm, and you receive a pay-out for the sale of the issued shares in the company.

The sale of a company is ferociously complicated and that complexity only increases for higher-turnover businesses. You should start the preparation you need to take your company to market at least 12 months before you start inviting others to bid for ownership.

You should ensure that, during both the negotiation and buying stages, that the following information is kept up to date:

  • financial accounts
  • legal issues and contracts
  • litigation and employee disputes
  • utilised debt

Once the initial negotiation is complete and a price has been agreed, expect the buyers and their solicitors to take every opportunity to denigrate as many aspects of your business as possible in order to secure a price discount. While you may be on friendly terms with your buyers, their solicitors are paid to secure your buyer the best possible deal so do not expect your interactions with them to be particularly cordial.

In addition to engaging us during and after the sale to provide financial information to your buyer and their solicitors, you’ll also need to take advice on taxation following disposal – please contact us for more.

Once the negotiations have concluded, you should budget 4-6 months for due diligence and the drawing up of the final sales and purchase agreement to occur.


Exit Strategy Support At Accounting Gem

Taking the decision to leave your business is an emotional decision. How you leave your business is a big financial decision whose consequences will dictate the quality of your life after you’re no longer a (major) part of the business you’ve created, nurtured, and grown.

Therefore, you need to have access to accountants and solicitors who are experienced in the sale of businesses or the handover of businesses to the next generation during this time. This is especially so if you wish to retire permanently and live off either the proceeds of the sale or the drawings from the company from which you’ve stepped back.

Your Accounting Gem partner is here to guide you through the entire process of exiting your business but please remember that it’s important to start your exit planning as soon as possible. Whichever method you choose to exit, the likelihood is that you’ll still be in situ for the next two years and you have to maintain the health and profitability of your business in the face of the multiple distractions that exit planning will present to you. Get in touch with us on 01473 744 700 or email us on contactus@aag-accountants.co.uk.