How to Exit Your Business

Reviewed by

Christopher Andersen

Reviewed by Christopher Andersen

Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,. He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.

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25th April 2024

Most people begin to consider an ‘exit strategy’ when the business has grown profitable enough to consider selling, or if life plans necessitate a change of tack. To ‘exit’ a business means closing it in the most efficient and beneficial manner based on its circumstances.

Why Every Business Needs a Strategic Exit Plan

Here’s how a well-crafted exit strategy benefits everyone involved:

• Maximise Your Return: A well-structured exit plan helps you identify and strengthen the aspects of your business that make it valuable to potential buyers (strategic acquirers, private equity firms) or qualified successors (internal candidates, family members). This, in turn, boosts your financial return when it’s time to move on.
• Peace of Mind, Even in Unexpected Events: Life throws curveballs. An exit plan prepares you for unforeseen circumstances, like illness or market shifts. By having a clear strategy in place, you avoid making rushed decisions under pressure and ensure a smooth handover, regardless of the situation. This protects the interests of your employees and minimises disruption to the company’s suppliers and customers.
• A Legacy That Endures: Many business owners pour their heart and soul into their ventures. An exit plan allows you to shape the future of your company. You can choose the right successor who embodies your values and vision, ensuring your legacy lives on.
• Minimize Taxes and Legal Headaches: Selling a business can involve complex legal and tax implications. A good exit plan, developed with the help of financial and legal advisors, minimizes these burdens. This way, you keep more of your hard-earned money and avoid unnecessary legal complications.

Popular Exit Strategies

Selling Your Business

For many entrepreneurs, selling a business outright is the preferred exit strategy. To command the highest valuation and most attractive offers, you must strategically prepare your company for sale.

Begin with a comprehensive audit of your business to identify areas that could increase the value or deter buyers. Focus on key profit drivers, cost efficiency, and potential risks that could be mitigated before going to market. Streamlining operations not only makes your business more attractive but also demonstrates its potential for growth and stability to prospective buyers.

It’s crucial to ensure that your financial records are transparent and up to date, as these will be scrutinised during the due diligence process. Engage a solicitor early to assist with legal preparations and to navigate the complexities of sale agreements and capital gains tax implications. Addressing these details will help streamline the sale process, making your business a more compelling proposition for potential buyers.

Family Succession

A family succession allows you to preserve your life’s work by transferring ownership and leadership to a chosen heir, ensuring the continuity of the business’s legacy.

Facilitating a smooth transition requires thoughtful planning and preparation. Begin this process early by identifying and grooming the right successor, involving them deeply in all aspects of the business from operations to strategic planning. It’s also essential to engage a solicitor to clearly document your succession wishes and related legal documents. This step not only formalises the transition but also addresses potential legal implications, including inheritance tax considerations.

Management Buyouts

A management buyout (MBO) is an excellent option for businesses with a competent management team willing to take the helm. This exit strategy ensures business continuity and stability, as the new owners are already familiar with the business’s operations and culture.

Carefully planning this transition is crucial to addressing the financial aspects and managing the interpersonal dynamics that might arise. Engage financial advisors and legal experts early in the process to assess the viability of the buyout and structure the deal effectively. This includes navigating the financial arrangements, such as securing funding through banks or private equity investors and ensuring compliance with relevant UK corporate laws.

Additionally, it is advisable to involve a solicitor to draft and review all legal documents to prevent any future disputes and to facilitate a smooth and successful transition.

Liquidation Options

When it becomes necessary to cease business operations, liquidation offers a means of transforming any assets into cash in a legally proscribed manner. This process dissolves the company by selling its assets to pay off debts, or for the benefits of shareholders.

There are two primary forms of liquidation for UK businesses:

Members Voluntary Liquidation (MVL): Suitable for solvent businesses deciding to wind down, an MVL allows for assets to be distributed to shareholders in a tax-efficient manner. The process must be carried out under the supervision of a licensed insolvency practitioner, ensuring everything complies with the Insolvency Act 1986.

Creditors Voluntary Liquidation (CVL): This form of liquidation is for insolvent companies that cannot meet their financial obligations. In a CVL, a licensed insolvency practitioner is appointed to liquidate the company’s assets to settle debts with creditors, in accordance with the Insolvency Act 1986.

For both types of liquidation, the appointed insolvency practitioner handles the necessary legal and financial procedures, making additional legal counsel typically unnecessary unless specific legal issues or disputes arise during the process. Their expertise ensures that the liquidation is conducted fairly and legally, safeguarding the interests of all parties involved.

What Tax Implications Should I Consider When Planning an Exit Strategy?

When planning an exit strategy for your business, you should consider several key tax implications. Capital gains tax will likely apply to any profits made from selling your business shares or assets, whether through an outright sale or during liquidation. The rate you pay depends on your total taxable income level and whether you qualify for entrepreneurs’ relief, which allows you to pay just 10% tax on gains up to a lifetime limit.

If you are passing the business to family members or into a trust as part of a succession plan, inheritance tax becomes a concern when the transferred business assets exceed the nil-rate band. However, you may be able to claim business property relief or gift holdover relief to partially or fully mitigate this tax liability if certain conditions are met.

You also need to ensure any outstanding corporation tax owed by the company up until the exit date is properly settled. Distributing retained profits in a tax-efficient manner prior to your exit can minimize this corporate tax burden, especially in liquidation scenarios.

If your business is VAT registered, there are various VAT implications to manage like deregistering, transferring the VAT number, and accounting for VAT on asset sales. Careful VAT planning specific to your exit route is required.

No matter which exit path you choose, it is absolutely crucial to get professional tax advice from an experienced accountant.

FAQs on How to Exit Your Business