Successful Business Exit: What You Need to Know

Introduction to making a successful business exit

As an SME owner, business exit will arise at some point, whether you decide to sell the business to a
third party, merge with or be acquired by a larger company, arrange a sale of the business to
management and/or employees, or pass ownership to family members as part of estate or succession
planning. In each scenario, there are different paths you can take to secure the most successful business exit. The definition of a successful business exit will vary based on your personal and financial goals, but
whatever these may be, in order to achieve them it is always advisable to start preparing the
groundwork and putting plans in place as early as possible.

According to a report in 2023, 48% of small businesses do not have a specific exit plan in place.
However, the opportunity for business exit may arise unexpectedly, and these plans cannot be
implemented overnight. Determining your goals in an exit scenario and planning early will give you the
time to incorporate what you deem to be factors of a ‘successful’ exit; with the right plan and support
from your legal and other professional advisers, you can dramatically improve the likelihood of a
favourable outcome. This guide will set out different circumstances in which business exit may arise,
and discuss success factors and potential exit strategies to consider in order to achieve them.

What determines a successful business exit?

It may be helpful to reflect on what ‘success’ means to you in a business exit. Whatever your specific
goals are, inevitably you will be balancing up the following main considerations:
Highest returns and lowest cost of sale

Highest returns and lowest cost of sale
Length of negotiations and professional costs
Lowest tax bill
Lowest liability and ongoing legal obligations
Level of future responsibility, ownership or management
Constraints on any personal future commercial or business plans
Preservation of company legacy
Possible impact on company culture and loyal employees
Possible impact on your supplier network

When should you exit your business?

There are no hard and fast rules on this, but every business owner wants to be in control of the ‘when’
as opposed to being faced with a situation of ‘having to’ sell. You can plan for the ideal time and set of
conditions for a sale, but you might also want to be prepared for the out-of-the-blue unexpected offer
to buy. The other way to look at this is to ask yourself ‘when would anybody buy this business?’.
Inevitably buyers and sellers are taking into consideration on or more of the following factors and
seeking to play each of them to their advantage:

Price/Business valuation: are buyers and sellers of a similar view about the current value of the business? Has a seller understood how to maximise and or explain the value?
Financial performance: does the business have a well-documented trading history and been consistently profitable or able to display the potential for increasing the profitability?
Market conditions and industry trends: is there demand for such a business? If so, what type of buyers are looking?
Tax implications (and changes): Will upcoming changes in the tax regime have an impact on a seller’s motivation to sell or a buyer’s motivation to buy?
Laws and regulations (specifically tax, company and employment law): Are changes set to make such businesses harder to operate or might legal changes be raising the barrier to entry which is increasing scarcity and improving value?
Availability of potential buyers (including competitors)
Seller motivations: are life changes external to the business causing a re-evaluation of the desire to be involved in the business

Understanding successful business exit strategies

There are several different exit options. After your initial planning stage, you should be able to identify a
preferred strategy for a successful business exit. Below, we have listed some well-known exit strategies, together with the similarities and main differences between them.

Business sale (trade sale) – Selling to a competitor, investor or private equity firm
In a trade sale, you will usually be giving up 100% control to a buyer and, with some exceptions, having no ongoing involvement with the company.

This strategy is best suited for business owners who are seeking a financial exit and are willing to source and negotiate a deal with a third party. The process may be lengthy, both from the point of viewof finding a suitable buyer as well as going through the necessary information sharing and negotiation phases which all buyers will want in order to know that they are getting a worthwhile deal. Some important points to note are the due diligence processes, tax implications, and compliance with the Competition and Markets Authority (CMA) regulations.
Mergers & Acquisitions – Merging or partnering with another company for financial or strategic purposes
This is different from a trade sale in that whereas a trade sale might be appropriate for buyers who want to diversify their holdings, a merger is more about combining one or more entities in order to create substantial growth of a business. This strategy is best suited for a business owner who is looking to integrate their business into a larger entity, whilst possibly retaining a leadership role going forward.

Often the consideration for a merger will not be fully in cash but could comprise a significant equity holding in the enlarged entity or combined group. Mergers, as well as taking time to negotiate, also take a long time to plan and execute, compared to trade sales.

This option requires an understanding of UK corporate merger laws, shareholder obligations and potential regulatory approvals from the CMA.
Succession Planning – Transferring ownership to a family member or key employee
According to a 2023 survey, around 75% of SMEs are family-owned businesses. Of these, 98% are family-run (i.e. the family who majority owns the business is also involved in managing the business).

As such, this strategy is best suited for business owners who wish to transfer ownership to a family member on their exit, in order to maintain family ownership of the business and preserve family legacy.
Management Buyout (MBO) – Key employees assume control of the company after your exit
In a Management Buyout (MBO), the business is sold to existing managers or employees. This is most suited for business owners who are invested in the idea of allowing the employees who have helped to grow a business to continue in its ongoing success. Given that the existing management and the management post-sale will be the same, all parties are well motivated to maintain the value of the business during the transfer process and create a seamless transition.

In addition, there are specific tax incentives for MBOs such as lower CGT rates, and negotiations are usually amicable and therefore potentially quicker than a sale to a third party. Please note that this is still treated as the sale of a business, and so will likely necessitate a Share Purchase Agreement and financing agreements, as well as the other essential legal documents and obligations mentioned in point 1.
Employee Ownership Trust (EOT) – Sale of a majority of shares to a trust, held for the benefit of employees
Similarly, sale to an employee ownership trust (EOT) is another potential strategy which would allow employees to assume control of the business. This would involve setting up the EOT (a substantial process involving trustee selection) and selling a majority of the company shares to the trust on exit; the trust then holds the shares on behalf of all eligible employees. This option comes with significant tax benefits, such as CGT relief on the disposal of shares to the EOT. This option is best suited to business owners who are confident in their workforce and would like to preserve company values, as after the sale the business will be managed by its employees, through an employee council or board of trustees.

Understanding the transaction process

Once you have determined your goals, decided on a specific exit strategy, and sourced a potential
buyer, it is important that you understand the chronology of the transaction:

Negotiations
Agree terms of the deal: we strongly advise using Heads of Terms (a brief, non-binding summary of the transaction terms)
Diligence phase (both legal and financial): the purchaser will request information, the lawyers/accountants will help provide, curate and display this whilst highlighting any potential legal and financial risks in the sale
Legal risk assessment and mitigation. Both buyers and sellers are exposed to some form of legal risk or liability. These become most apparent after the diligence phase and both parties will be seeking to minimise these and allocate them between the buyer and seller through continued negotiations prior to the documentation phase. Some examples of the most important issues are:
a. Contractual risk – many trading or lending contracts contain restrictions on change of ownership or acceleration clauses in the event of a change of control. The seller will need to obtain the required permissions;
b. Latent risk – some risks are known, but their extent is not ascertainable at the time of sale. Often the only solution is for a seller to protect a buyer through the use of an indemnity.
c. Regulatory – regulated businesses will usually require prior approval for a change of control and often need to fulfil pre-conditions set by the regulator prior to sale.
d. Employment. Depending on the deal structure, several legal requirements have to fulfilled prior to a sale.
e. Taxation. Non-compliance with tax laws is very difficult to ascertain even following a due diligence review and often the seller is required to give special warranties and an ongoing covenant to protect the buyer against any historic compliance failures.
Documentation stage: once the deal structure and the risk allocation discussions are finalised, the main document will be the sale purchase agreement, which:

records all actions and deliverables that you are required to do to transfer ownership
gives the buyer necessary comfort about the legal risks they have identified
sets out payment terms (immediate or deferred to a later date)
Completion: once everything is agreed, most completions will occur within a set day when all documents will be signed and exchanged, any physical delivery of assets or handover of premises and/or equipment will take place. Completion takes place in such a way that no party takes a risk on the other party failing to meet any agreed obligations or conditions, including paying the purchase price, for the transfer of the business.

Steps to take to ensure a successful exit

In your role as the business owner, you will take the lead in defining the strategy and take charge of the
planning right up to the day of sale. You would be well advised to:

1) build an internal team to both organise the transaction and protect business operations and the value
of the business during planning, negotiation and execution phases, and
2) seek support from professionals to thoroughly prepare for your chosen strategy and properly
prepare for, and execute, the transaction.

Careful thought needs to be given to how you balance the requirements of growing a successful
business, and making it attractive to buyers, with the requirements of preparing for a sale. Generally,
we can identify that a successful sale will be on the back of strong leadership, clear planning, long term
thinking, protection of business activities a

Building an internal team
It goes without saying that a well-run business is an easy business to sell. Equally, it is unlikely that you as a business owner have the bandwidth to manage all aspects of the sale. You will need to involve all or part of your senior team to assist you with preparations for exit (and while, as is usually the case, keeping the matter confidential).
Seeking support from professionals
In tandem with building an internal team, it is also essential to seek professional partners in the key areas of finance, tax and legal. Ideally, such professionals are well versed in the relevant issues in operating a business and have solid transactional experience in business sales. In the first place they can be valuable in tutoring you in the essential knowledge of what is involved in a sale (especially where you have not been able to add people with such knowledge to your own management team). Secondly, engaging such professionals will pay dividends over time as they accrue their own detailed knowledge of the affairs, history, activities and inherent risks of your business. This will play to your advantage in the transaction phase by shortening transaction timing, the ability to delegate to them the lead on key workstreams as well as anticipating requirements and expectations of the buyer’s professional advisory team. This should go a long way to limiting the more stressful aspects of the sale and avoiding last minute surprises and fire drills which either add to the overall cost or timing of the sale or, worse, hand to the buyer the opportunity to renegotiate or walk away from the deal.

Conclusion

Planning and executing a business exit can be stressful; market uncertainty, legal and tax changes and
unexpected obstacles during the administration of the exit can make this major decision even more
difficult. It may arise in several different circumstances in which you will have varying degrees of control
as a business owner, whether you encounter an offer from a third party or engage in deliberate
succession planning.

You may define a successful business exit as a quick sale and a clean break, but this is only an ideal
and cannot be achieved overnight. In reality, a well-planned exit strategy may take years to build and it
will require a strong internal team and support from external partners, but this will increase value in the
sale and allow you to retain control throughout the transaction. Our role at Farringford Legal is always
to work to your level of skill and experience, and make up for any residual gaps in your knowledge.

Search site

A Guide to a Successful Business Exit