To ‘exit’ a business means closing it in the most efficient and beneficial manner based on its circumstances. If you’re insolvent, then the correct exit might be a liquidation which offers an orderly means of closure. In other instances, you might want to sell the business as part of your retirement strategy.

Why Every Business Needs a Strategic Exit Plan

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

  • 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.
  • 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.
  • How to Exit Your Business– 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.
  • Tax Efficiency – 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, 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.

Family Succession

A family succession allows you to preserve your life’s work by transferring ownership and leadership to a chosen heir.

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.

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.

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.

Liquidation Options

When it becomes necessary to cease trading, 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 benefit 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, an appointed insolvency practitioner such as ourselves handles the necessary legal and financial procedures. 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, tax should be factored in. 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, if certain conditions are met.

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

Assess your business’s current financial situation, including all liabilities and assets. Prepare for potential tax liabilities such as capital gains tax and ensure that you understand how different exit strategies could impact your tax obligations.

When determining the value of your business, it’s important to use methods that match the nature and financial stability of your company. Here are two common approaches:

  1. Discounted Cash Flow (DCF) Analysis: This method is ideal if your business has a predictable and stable income. It calculates the present value of expected future cash flows. This means estimating how much money your business will generate in the future and then working out what this is worth in today’s money. This approach is helpful for understanding the long-term value of your business based on its current performance.
  2. Multiples Approach Based on EBITDA: EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. This method involves taking your business’s earnings and applying a ‘multiple’ that is typical for your industry. The multiple is a figure that represents how much businesses like yours are worth compared to their earnings. For example, if businesses in your sector are typically worth five times their annual earnings, and your business earns £100,000 a year, it might be valued at around £500,000.

It’s a good idea to consult with a professional appraiser who can guide you through these methods.

Develop a transition plan that includes timelines, training for successors, and communication strategies to inform all stakeholders of the change. Consider staying on in a consultancy role to ease the transition.