Exit Strategies for Small Businesses

Types of Business Exit Strategies

There is no one-size-fits-all approach to exit/transition planning. The following are some of the most common strategies that SME owners may choose to gain value from their exit:

• Trade sale: Your business is purchased by another company, which is usually within your field of work (or closely related to it). In an outright sale you are rarely free to leave your business immediately so expect some form of tie-in for a period of time to help the new owners achieve continuity or stability. Usually your pay-out will come in stages linked to the continued success of the business during this time.
• Private Equity Investment: Your business’ shares, in their entirety or a portion, are purchased by a private equity company which will invest in the business to grow it rapidly before selling it for maximum gain. Similar to the trade sale, the PE investor is likely to want you to remain within the business, or at least as a consultant to it for continuity. But if the business grows rapidly so will the value of your remaining stake giving you the potential for a sizable second pay-out when the business is subsequently sold.
• Management Buy-Out (MBO) / Management Buy-In (MBI): The current or new management team purchase the company and assume responsibility for ownership and operations.
• Employee Ownership Trust (EOT): This is an increasingly popular alternative to an MBO enabling the company’s staff to purchase the business over a defined period, usually between three and seven years. An EOT rewards staff for their service, delivers a tax efficient financial solution for the former owner and, due to gradual nature of the purchase, makes it more affordable for the incoming management team.
• Share sale: In this situation, a single shareholder sells their shares to other shareholders or to the business. This form of exit is one of the most straight-forward and can result in a more immediate release from the business as there is usually no tie-in.
• Ongoing ownership: A business owner may choose to retain partial, or even full, ownership so that the existing management team are responsible for operations, while providing advice or consultancy when required and drawing a dividend income from his or her shares. The owner will usually keep a close eye on the performance of the business and the Executive Directors by attending regular board meetings.
• Family Business Succession Planning: Family-owned businesses are often passed down the generations so that the organisation isn’t sold to external buyers; while this is often agreed many years in advance, it’s important to ensure that personal ambition or unrealistic expectations don’t damage the business or threaten to disrupt continuity. Therefore, carefully preparation is required over many years to prepare younger generations before they take over the running of the business. Quite often a business owner’s children may not wish to take over the family company. It’s important to be honest and realistic about this rather than pressing ahead out of loyalty, duty or expectation.