When planning for exit, it is important to understand the different sale options available to you, and how these could help drive the value of your future personal wealth.
This article will focus on four types of business sale; management buyouts (MBOs), next generation succession, Employee Ownership Trusts (EOTs) and third-party sales.
Management Buyouts (MBOs)
MBOs can offer exciting opportunities to management teams but require careful planning and can be complex and time-consuming.
Defined as the acquisition of an existing company by its management team, this transaction structure can help an owner de-risk by extracting cash at tax efficient rates. MBOs can be financed by a combination of debt and equity.
Managing the day to day operations of the business whilst leading a transaction can be challenging. It is important to fully appraise financial forecasts to ensure there is suitable funding for the transaction and to plan for other aspects including deal structuring, tax planning and project management. It is also important to ensure the business continues to perform well throughout the process.
There can be many variations on an MBO including Vendor Initiated MBOs (VIMBOs), Family Buy-outs (FAMBOs) and Management Buy Ins (MBIs).
Each type of ‘Buy-out’ can be used to facilitate either a full or partial exit from the business and can be a great option for phasing to retirement.
Overall, the key factor for a successful MBO relies greatly on the level of commitment from both the buyers and the sellers.
Next Generation succession
If you want to keep ownership within the family, current leaders need to identify candidates from the next generation. An advantage of having family members succeed is that they have most likely been involved in the business for a long time and can continue the family legacy.
A family business can be gifted to the next generation or ‘sold’ in a structure similar to a MBO. This involves the next generation generating their future value by continuing to drive the business forward, paying back any debt.
Whichever option you choose, it is key to plan for this early to ensure a smooth transition of responsibility and key relationships with customers, suppliers and contacts.
Change at the top can lead to a period of uncertainty both internally and externally. After the transition, it can be a good idea to put in place positive PR and relationship plans to smooth over any issues.
It’s also vital to set rules for operation and interaction between the board and the family. Family relationships are not always in sync with the needs of the business and these need to be managed appropriately.
Planning helps, as does conversation, and it’s always useful to get an external perspective to remove emotive family aspects from this key business decision.
Workforce engagement is key to business success and Employee Ownership Trust’s (EOT) can help reward loyalty and performance giving employees an opportunity to hold a controlling stake in the business.
EOTs can provide tax benefits for the seller and create improved employee engagement, lower absenteeism and innovation.
Funding for EOTs can be raised in a similar way to MBOs, with the business needing to continue to generate future profits to make repayment contributions.
Third party sale
Finding a buyer from outside your business can be daunting. From the competitive dynamics of auction processes and negotiations, to deal structuring and finding the most appropriate buyer.
The preparation phase of selling your business is the first step towards a successful sale. Good planning will maximise the benefits and reduce the inherent risks.
4 key elements to good planning are:
- Analyse the context of the sale and your key objectives
- Perform a diagnosis of your business and identify the key drivers, USPs and weaknesses
- Appraise the business forecasts, growth prospects and market trends
- Work with an advisor to assess the best timing and to help prepare selling material to provide to the buyer
After planning for sale, it is time to consider your options in order to choose the right buyer. By understanding what makes your business attractive to others, you and your advisor can research the most appropriate buyers and start approaching.
Each exit option available to you should be fully appraised against your business, and against your personal objectives.
In what can be an extremely time pressured and stressful process, our deal advisory experts will work closely with you from planning through to successful completion to help you achieve your goals.
Business owners frequently state that there are barriers to implementing strategies for succession, including a lack of time or skills. However, advice is always available to help you implement successful succession plans.
To obtain independent and objective succession planning advice on ways you can exit your business, tailored to your specific goals, please do not hesitate to get in touch.