How To Choose The Right Exit Path For Your Business

MBO

A management buyout is where your management team buy your business, helping to create a smooth transaction and leaving your business in the hands of people who know the business and the way it works.

Advantages:

• A faster, easier process.
• More confidentiality.

• Suitable for smaller businesses.

Disadvantages:

• Management team lack the right ownership skills.

• Funding difficulties.
• Risks of insider trading.

Read more about the pros and cons of a management buyout in our blog.

MBI

A management buy-in is where an external management team buys a controlling ownership stake in your business. If your business has great potential but is currently under-performing, an outside interest may feel inclined to purchase the business and move to change the current strategy to help the company scale.

However, when an external management team buys into your business, they can change the current board and replace existing management if they feel they are not performing well enough. This can be unfavourable in the eyes of your employees and can cause complications if they do not fit into your company’s culture.

Trade Sale

This is when your business is bought by another company in a related industry to your own and could include your competitors. Your buyer is likely to know how your industry and market works making the sale quicker and easier. A trade buyer will likely try to negotiate the price down, sometimes even below fair market value. A pre-sale due diligence conducted by the seller is essential to try to pre-empt issues a buyer could use to drop the price. These can potentially be conducted by external consultants such as hgkc.

It can also be beneficial for your business if your buyer is known by your customers, it can be less disruptive and seen as favourable by your target audience.

On the other hand, if your company is bought by a competitor, your management team and employees may feel their days are numbered and during the sale process, productivity can fall, and the business may fail to operate as efficiently. If your customers do not see your buyer in a favourable light, this can damage your company’s reputation and lose business.

For tips on finding the right buyer for your business, read our blog.

Employee Ownership Trust

An EOT is where a trust holds a controlling stake of your business. This ensures you sell your business at a fair market price that must be obtained from a professional valuation. An EOT also helps the seller avoid capital gains tax and your business will not have to spend any time looking for a suitable buyer. This option helps your employees feel valued and creates a happy working environment. However, it takes time to prepare your employees for ownership.

The owner has the option to take an initial payment, and then future payments from the EOT made from future profits. Your management team must have an ownership mindset and be able to run the business effectively once the owner exits. If the business doesn’t make a profit, the owner will not be paid.

Once a business has been sold to an EOT, the proportion of the business the EOT holds cannot be sold again. It is a great option for a business to leave a permanent legacy.

It is important that you research what exit options are available to you and for more information on exit strategy and preparing your departure from your company, read our page on exit planning.