Bye-bye your business
As the saying goes, all good things must come to an end. It got me thinking about why business owners seek to exit businesses, and perhaps more importantly, what are the options available to you.
I’ve dealt with many business owners looking to exit their business, and there’s always an interesting story behind things – to be fair, the stories are far more interesting than the legal work required.
Reasons for exiting a business could be:
- Retirement – the business has done well and you want to reap the benefits and enjoy them
- Ill Health – you cannot continue running the business
- Growth – someone else can come in and take your and grow it
- Success – or lack of it. The idea didn’t work, you ran out of cash, etc
- Cashflow – similar to 4, but often the business is good but the cash flow isn’t there for a surprise bill
- New challenge – you’re the type that gets bored and wants a new challenge
- Owner issues – a dispute between shareholders, a divorce, etc.
Sometimes I’ve come across clients that didn’t think they were selling and then received interest randomly and then, when an offer was made, was just the right figure to get them selling. Unusual, but possible.
Whatever the reason, there are a few ways in which an exit can be achieved:
- Sale of the Business – either to an existing shareholder or to a third party – sale of shares or sale of assets
- Management Buy Out – Sale of the business to someone working in the business
- Administration/Liquidation – a winding up of the business by an insolvency practitioner
- Members Voluntary Liquidation – liquidation where there are no debts
- Simple closure of the business
For many, there’s a lot of planning that ought to be carried out prior to an exit – sometimes it’s not possible, but if it is done, then one can often maximise value obtained – particularly on a sale.
As you can see, when it comes to exiting a business, owners have a variety of options to choose from. Each option has its own set of pros and cons, and the best choice will depend on the individual circumstances of the business and the owner.
Selling the business to a third party is often the most financially lucrative option for business owners. This can include selling to a competitor, a customer/supplier, or a strategic buyer. The process of finding and negotiating with a buyer can be lengthy, and owners will need to prepare the business for sale by cleaning up financial records, improving operations and generally getting their house in order. However, once the sale is complete, the owner can walk away (hopefully with a substantial payout!) and move on to their next chapter.
Another option is passing the business on to a family member or key employee. This can be a great way to ensure the legacy of the business continues, and it can also provide a smooth transition for employees and customers. There are ways to do this on a reasonably tax-efficient basis where the business has sufficient cash in the bank or distributable reserves.
For some business owners, shutting down the business may be the best option. This can be the case if the business is no longer profitable or if the owner is ready to retire. When shutting down a business, owners will need to notify employees and customers, pay off any outstanding debts, and dispose of any assets. While this may not be the most financially lucrative option, it can provide a sense of closure for the owner and allow them to move on to their next chapter.
On a business closure, there are three options:
- administration/liquidation – for where you have debts that cannot be repaid.
- a solvent liquidation – where everyone is paid up fully
- cease trading
In a solvent liquidation, known as a members’ voluntary winding up, the directors have to make a declaration that all creditors will be repaid in full. An insolvency practitioner needs to be involved and there’s a cost attached to it. It is the proper way of closing a limited company business.
The alternative is simply to ensure everyone is paid, cease trading, and eventually the company will be struck off by Companies House for failing to file relevant information. It’s not the best way, but it is cheaper and therefore lots of small business let this happen.
If you’re not trading through a limited company, then you can still exit the business and the above still applies. But instead of a share sale, you might sell the assets of the business. And instead of a closure of the business, you just stop trading and you don’t need to follow any process.
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