12 March 2024
If you are considering an exit from a business that you have spent much of your life building, it’s very important to get things right to ensure you maximise the value on exit. Here we outline some of the most common exit routes.
When thinking about the next chapter, deciding what kind of transition makes the most sense for the business’s circumstances is crucial. Here we outline some of the most common exit and succession options for entrepreneurs considering an exit.
1. Passing the business onto family
This kind of transition needs to be handled delicately, and owners who are considering transferring control should ask themselves whether the business can continue without them; what happens when some family members are involved, and others aren’t; and whether they have extracted enough wealth to fund their post-exit lifestyle. In our experience, we have seen succession in name only but not in practice. Sometimes these conversations can be challenging, particularly with family members, but it is important that there is a practical transition plan in place so that an outgoing business leader is not overshadowing their successor and inadvertently undermining their position.
Irish law governing the tax treatment of business and farm succession by way of a gift or inheritance has been written with the importance of indigenous small and medium-sized businesses to the Irish economy in mind. Family succession offers the most options for optimising tax positions. We believe it is important for business owners to take an integrated approach to developing tax-efficient exit plans as well as ensuring their personal position is augmented post transfer. Transferring a company to children has the potential to attract different taxes, including a CGT liability for the parent business owner plus a gift or inheritance tax liability and stamp duty for the children.
Tax legislation is always subject to change so tax considerations should be a priority in any disposal. The 33% rate of CGT applies to any gains that are not covered under available tax reliefs.
There are three main reliefs available to business owners: retirement relief or entrepreneur relief for the business owner, and business relief for the successor to the business. Agricultural relief is another incentive that encourages farmers to pass on farms to their children during their lifetime or when they pass away. Which of these reliefs applies depends on several factors, including the value of the business, whether the business is being transferred to a family member, and the age of the business owner. The key consideration, of course, is to minimise or eliminate CGT and CAT.
2. Trade sale
A trade sale involves the sale of the entire business to another business that is often a competitor or a partner. For businesses seeking to scale quickly, the acquisition of a direct competitor can help deliver that objective within a shorter timeframe than by organically growing the business. Trade buyers are likely to be familiar with the industry in which you operate, which can lead to a more efficient process with the industry in which you operate, and shorter transaction timelines. In addition, as trade buyers can often extract greater synergies from the transaction than private-equity firms, such as combining departments or functions between two similar businesses, trade buyers may be willing to pay a higher valuation multiple for your business than a private-equity buyer, which is obviously good news for the seller. A trade sale is often the cleanest form of exit, particularly if you are selling 100% of your business.
3. Private equity (PE)
A sale to private equity involves selling a percentage of the shares in the business, from a minority stake to majority ownership. At one end of the investment spectrum, a venture-capital fund will take minority stake investments, typically in smaller emerging businesses. For more mature businesses, however, PE buyers usually look to buy a controlling stake. Regardless of the stage of the business seeking PE investment, one thing all PE buyers have in common is that they seek to invest in strong management teams who can demonstrate solid growth projections. A typical PE investment horizon is three to five years, during which time they’d hope to grow the business two- or threefold, and after which they’ll look to sell up and move on.
Corporate finance specialists like Goodbody have years of experience negotiating with PE investors and are well-placed to facilitate these kinds of deals. We also have a network of partners across Europe and the US, with whom we can connect to take advantage of their local knowledge. AIB has extensive experience providing debt funding and wider financing packages to support transactions where a PE firm is acquiring a stake in a business. AIB also has a track record of providing further funding solutions to these businesses to enable business growth through acquisitions as well as organically.
4. Management buyout (MBO)
As with any sale, a buyout gives the owner the chance to unlock their wealth from the business. If market conditions are favourable, an experienced management team might look to execute an MBO whereby the management takes over all or part of the business. As the team is unlikely to be able to raise all the capital among themselves, they will often need backing from external investors and/or debt funding. The investors are usually PE funds who take a stake in the company in exchange for financing the deal.
In our experience, most companies that are open to an MBO find themselves in this position because there is a good relationship between management and the owner. This is often due to the owner putting in place the right management team many years before their own exit because they know they will take the business forward when they retire. Careful selection of a competent management team and ensuring the transfer of key business knowledge and relationships is critical for any owner to be able to extract themselves from the business when it is time to leave.
5. Recapitalisation
An effective way of distributing cash to shareholders without an outright sale of the business is to consider a recapitalisation. For example, a dividend recapitalisation is where a speciality lender provides a loan to the company that is then distributed to shareholders via a dividend. The dividend can be distributed to all shareholders to create liquidity for the entire shareholder base, or alternatively, the loan can be used to buy back the shares of those shareholders who wish to exit, concentrating ownership in fewer shareholders.
Apart form ownership retention, there are tax advantages to this kind of exit. When an owner pays themselves out of company resources – salary, director’s fees, dividends – they will have to pay income tax at rates of 52%/55%. But by using the company’s cashflow to take on debt and then pay out an amount based on the value of the company, excluding any CGT reliefs that may be due, the owner may only be liable for CGT at the standard rate of 33%.
6. Initial Public Offering (IPO)
IPOs are rarer because they would usually only be considered by companies that are looking to raise tens of millions of euros in new capital. They are probably the best way to create wealth for shareholders and scale for stakeholders, and the prospect of a lucrative exit is attractive for entrepreneurs. The benefits of going public are not limited to the financial windfall, however. An IPO brings many structural benefits for a business because the preparation itself is a long-term investment in sound management and financial practices. The discipline required to run a public company can also add value.
How we can help
At Goodbody, we understand that exiting the business is one of the most important personal and professional decisions that any entrepreneur can make. That’s why we believe in the importance of planning – and so, last year, the team at Goodbody and AIB Capital Markets put together a report on business exit planning and succession in Ireland. We wanted to arm business owners with practical information to be aware of and to action where appropriate.
So, whether your exit is on the horizon or a little further into the future - we're here to help. Our Succession Advisory Team, made up of M&A and tax specialists and wealth planners, offers business owners a coordinated one-stop advisory service across all aspects of a potential business exit, including both personal and corporate financial readiness for business owners. Download our report ‘What’s your plan?’ here.
