Exiting your business as an entrepreneur is a serious and heartfelt task. It will bring on a huge series of mixed emotions, as for most entrepreneurs it’s a once in a life time exit.
There are a variety of avenues to consider, which will determine not only your future, but that of your staff. There is not a right or wrong answer, as one size does not fit all, as it depends on individual business circumstances.
There are however, a number of questions that may help you determine the most appropriate route. Whilst the following list is not comprehensive, they should help give you an indication on what may be the best suitable route for you and your business.
Please see below for an outline of the different options available with a brief description.
Employee Ownership Trust - EOT
The business is transferred to a trust, which holds the shares on behalf of the staff. This option can be highly beneficial as it can offer substantial long-term tax-free payments, which can be made to staff. Additionally, the vendor takes all sale proceeds tax-free.
Third party funding or loan notes are used to facilitate this type of transaction.
Management Buyout - MBO
A select number of staff purchase the business from the vendor, generally the management team.
The management team will be expected to put in between one- and two-years’ salary each. They will need to raise the money individually to pay all their costs and will also need to source their own adviser throughout the process.
The funding is either facilitated by banks or equity providers or vendor loan.
Vendor Initiated Management Buyout - VIMBO
This is where the vendor (as in vendor-initiated management buyout) works closely with the management team, underwriting all the costs. Only one set of advisers is required to facilitate a sale to the management team.
The funding is the same as an MBO.
The sale of the business usually 100% to a third-party company.
It is not uncommon for there to be an earnout of some kind, that would require the vendor to remain with the business. In the event the vendor is not a key contributor to the business, they can exit usually within 3 to 6 months.
There is a risk that if certain functions within the business are centralised as a result, then this can have an impact upon the future of current staff positions.
Private Equity House Sale – PE Sale
This is where some or all of the business is sold to an organisation, who invest in multiple companies. Management will sometimes be given the opportunity to have a modest shareholding. Therefore, this is only usually suitable for reasonably sized organisations.
This type of sale is generally focused on an exit and large capital returns for the buyer.
The acquiring organisation may allocate a non-executive director to the board.
Which of the following is most important to you?
- Releasing as much money as possible, straight away. (Trade Sale or PE Sale)
- Leaving the business on day one of the new ownership, assuming of course you have made yourself dispensable. (Trade Sale/PE Sale)
- Retaining the culture and values of the business (MBO/VIMBO/EOT)
- Rewarding staff for years of service by giving them a stake in the new ownership? (MBO/VIMBO/EOT)
- You want to act quickly (EOT)
- You want to see your legacy maintained (EOT)
What’s best for your leadership team?
- Do you have a complete and effective team? (PE/MBO/VIMBO/EOT/TRADE)
- Do they have the ability to borrow personally up to 2 years’ salary? (MBO/VIMBO)
- Do they have a high-risk appetite? (MBO/VIMBO)
- Do they have a low risk appetite? (EOT/TRADE SALE)
- Do they wish to create a business with capital value to realize again at a future date (MBO/VIMBO)
- Is your business very dependent on the management team? (ALL OPTIONS)
- Do the management team see the business as existing in the long term to the benefit of all staff? (EOT)