We regularly talk about planning for the future for your family and personal possessions, however it’s also extremely important to plan ahead if you’re a business owner. In this guest blog, Chris Boakes from ACUMEN BUSINESS LAW discusses succession and exit planning and what you need to consider. Over to Chris…
Succession and Exit Planning
As a Corporate lawyer I regularly get involved in many business sales of five, six, seven and eight figure sum, but in the last decade I have only experienced one instance of the Victor Kiam approach (‘I liked the product so much I bought the business’). In the real world business owners will have to plan and explore the options available to them before beginning the journey to the retirement party. It’s a critical decision and careful planning can ensure a successful outcome on good terms, failing to plan can have significant negative impact on the ability to sell or the sale deal itself.
Typically businesses are not ready for sale unless this has been the objective of the business owners from the outset. Often businesses are in good shape but there are informal arrangements and quirks that suit the owner but are likely to put off a buyer or undermine valuations.
A business owner preparing to exit or begin handing over control and ownership is going to have to put in some hard work to ensure that the business is in the best shape possible on handover or sale. In simple terms the hard work will either improve the value or at least give credibility to the valuation. Often a business will experience an improvement in trade while this process is taking place.
Seemingly immaterial admin tasks can have a major impact on value if the company has not clearly authorised major decisions. Similarly, difficult decisions that have been put off, such as the disposal of loss making products, ceasing to provide inefficient services or the closing or transferring of certain departments, will need to be resolved. The seller/outgoing owner is best placed to implement such resolutions. It is the business owner that has the responsibility to ensure such decisions are being made, however painful. In my experience the time from the decision to sell or progress with a management buy out (MBO) to the date of completion, can be up to 5 years. Often upcoming talent leave or don’t quite fit the bill for an MBO and all sorts of factors can stall a sale (economic down turn, technological change, political changes, etc.).
Pages (and pages) can be written about the various sale options available to a business owner. As this is a short overview, I’ve provided below a ‘helicopter view’ of the various options:
Trade sales – A trade sale is a way of opening the business up to a wider market of potential buyers; it allows you to be in control of who takes over the running of your business. The sale can be either a share sale or asset sale, the structure will often be determined by tax and legal issues.
MBO/MBI – Management Buy-Ins and Management Buy-Outs can sometimes be the most effective way of exiting your business, as it allows the business to be taken over by people who already have experience in managing businesses.
Company purchase of own shares – By using a purchase of own shares strategy, an individual business owner is able to sell their shares to the company and is liable to pay tax only on the selling of these shares. As the business owner sells back shares in that manner, the minority shareholders’ proportion increases. This also allows cash to be drawn from the company in a tax efficient manner.
Voluntary solvent winding up – A solvent company can be wound up and its assets passed to the shareholders as capital distributions rather than income distributions. Subject to certain conditions, this can be another tax efficient option.
The above options are not exhaustive. For example, for some businesses a family succession or the listing on a stock exchange are other viable options.
Making this critical decision is essentially for the business owner but to do so with a clear understanding of the process and options will require expert advice from your accountant, solicitor and financial adviser. If you take away one message from this blog, let it be that this decision should not be made with advice from the ‘bloke down the pub’. Their experiences may be valuable as good commercial input, but tax policy and legal options should be handled by your team of professional advisors to ensure you get the best outcome.