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  • Writer's pictureRomesh Jeyaseelanayagam

Options for Business Exit


Options for business exit, brought to you by The FD Consultant. We are a collective of Fractional CFO advisors.

Introduction


Founders and Business Owners who are looking to exit their businesses should consider a range of options in order to achieve the most beneficial outcome based on their personal objectives, the nature of the business, market conditions and unexpected opportunities.


There are various business exit options available, and we list the most common types below alongside the benefits and disadvantages of each.

 

Business Sale to third parties


This is one of the most common forms of exit and could involve selling to a strategic buyer, such as a competitor or a larger company in the same industry, or to a financial buyer, such as a private equity firm or a venture capitalist. The owner can sell the entire business or just a portion of it, depending on their preference and circumstances.


If your business is profitable and scalable, then attracting a buyer should be very achievable. The Founder can negotiate with potential buyers on price, the opportunity to remain in the business in some capacity, or the ability to make a clean break, as well as other key terms.


However, it may take time to sell the business to external parties. Sale processes can be costly as well as time consuming, and less than half of businesses for sale are actually acquired. Should a sale proceed, the Business owner may have no choice but to remain for a period of time post sale depending on the agreement reached, and this may be challenging as they are often no longer in control at this point which may be a challenging scenario for many founders.


Family Succession


This is where the business owner is motivated to keep the business within their family, so this involves passing the business on to the next generation of family members.


This is an appealing option for those who want to pass down their company legacy to a child or family member, but can be a complex process that requires careful planning and communication. It’s important to ensure that the person is up for the job.


There are many upsides of this method of exit, such as the successor likely already being in possession of an intimate knowledge of the business and a good understanding of how it is run. This individual can be prepared for transitioning into a leadership role over a long period of time. With the business remaining in the family, the founder can retain involvement in the business, possibly choosing to assist in an advisory or consulting capacity.


The challenges that may arise in this scenario include blurring professional and personal lines which could lead to unnecessary financial or emotional stress for the family. As mentioned, it is important to ensure that the successor is capable of running the ongoing business effectively. Much consideration must be given to achieving the right balance between ongoing support and involvement versus allowing the successor to have the correct level of autonomy.


Management Buyout (MBO)


In an MBO, the business owner sells the company to its existing management team. This means that individuals already working within the business are able to transition in order to fill the gap in leadership. As the management team is already familiar with your business, they should be well equipped to manage the company and retain its values.


One way for employees to take over the business over the long term is an Enterprise Management Incentive (EMI) scheme, which are employee share options under which companies can grant rights to their employees to acquire its shares.


This can be a good option if there is a capable management team in place that is interested in taking over the business. The business owner will be able to trust that the business is being run by someone experienced in the organisation, and the handover process is likely to be more straightforward than it would be in a sale to a third party. There is less uncertainty and the business owner may have more control over the process.


This option is only available if there is a manager, employee, or management team who are motivated to take on leadership of the business. There is a risk that the transition to leadership may have a negative impact on business performance.


Merger


Instead of selling outright, the owner may choose to merge their business with another company. This can result in synergies and other benefits for both parties involved.


The pros and cons of this approach are similar to the Business Sale option, although if the business is merged into another organisation, there may be a loss of legacy which the seller could find unappealing.


Initial Public Offering (IPO)


Going public through an IPO involves selling shares of the company to the public for the first time. This can be a complex and expensive process, but it can provide the owner with a large amount of capital and liquidity. Needless to say, this option is mainly only viable for larger businesses.


While an IPO has the potential to be extremely lucrative, with the potential to earn a substantial profit, more so than any other exit strategy, it is also extremely challenging. This is a lengthy process with no guarantee of success. There is intense and ongoing scrutiny from stockholders, regulatory bodies and the public, so compliance and regulatory costs are high.


Additional requirements of an IPO include mandatory progress and performance reporting. While private investors could see huge potential in your business, the wider industry may not.


Franchising 


If the business model is easily replicable, the owner could consider franchising the business, allowing others to replicate the business model in exchange for a fee. This can provide the owner with ongoing revenue streams without the day-to-day responsibilities of running the business.


This is not necessarily a pure exit, with the Business owner needing to stay involved in some capacity. However, it could be an opportunity for the time commitment of the founder to be reduced after the franchising arrangements are set up.


Licensing or Royalties


If the business has valuable intellectual property, the owner can license or sell the rights to use that property to other companies in exchange for royalties or other payments.


This is only viable if the business owns qualifying IP, but is an attractive way for the founder to earn ongoing income.


Slow Down or Pivot


Sometimes, rather than exiting completely, the owner may choose to slow down operations or pivot the business into a new direction that requires less involvement or different responsibilities. One of the most cost-effective ways to close your small business is to slow down trading to ‘wind down’ your business and allow it to become dormant.


Business owners can stop paying taxes if the business is not receiving income or carrying on with trading activity. However, it is essential to note that specific administrative duties will remain, such as annual accounts and a confirmation statement to Companies House.


Liquidation 


If there are no buyers for the business or if the owner simply wants to wind down operations, they can choose to liquidate the business. This involves selling off assets, paying off debts, and distributing any remaining funds to shareholders. This is often considered a last resort as it may not maximise value.


This is a common exit for failing businesses, as all other options are exhausted. It will yield the smallest return of the options listed above as the only remuneration received is from the sale of everything the business owned and nothing more to recognise growth or future potential.

 

Summary


Business exit is something for all business owners to consider carefully. It is important to plan ahead to give yourself the best outcome.


Each of the options listed above has its own advantages and considerations, and choosing the right exit strategy for a founder depends on various factors, such as the owner's goals, the nature of the business, market conditions, and financial aspects.


Consulting with financial advisors, legal experts and other professionals can help business owners navigate the exit process and choose the option that's right for them.

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