Business exit strategy and succession: routes, tax considerations and how to choose

A business exit strategy is the owner’s plan for leaving and realising the value of their equity, whether to fund retirement or to invest in other ventures.

Most owners think about leaving their business long before they do anything about it. And when they do start, often their first question is the likely valuation. However, businesses are worth different amounts to different buyers; and for sellers, surprisingly often the highest valuation isn’t necessarily the right one. There are a host of non-financial considerations in play, and the starting point of an exit strategy should instead be gaining a clear understanding of the different routes available, and the pros and cons of each.

There are eight main exit routes. Some involve selling to a third party: another business, private equity, a family office, or a search fund. Some keep the business closer to home: a management buy-out, an employee ownership trust, a company purchase of its own shares, or gifting shares to the next generation. And sometimes the business has run its course, in which case a members’ voluntary liquidation is the cleanest way out.

Each offers a different balance of influence over the transaction and indeed post-transaction, tax efficiency, and continuity. Which one fits depends on the scale of the business, its risk profile for a buyer (which in turn is based on a multitude of factors), whether there is internal or family succession available, debt capacity, and numerous  tax considerations. And those three rarely point the same way.

In this guide, we set out each route, what it usually achieves and how the tax is treated.

Find out more about how we support owners through succession and exit planning.

What is a business exit strategy?

A business exit strategy sets out how and when an owner will hand over their business and on what terms. It covers the route (sale, succession or wind-down), the timing, how the buyer pays and the tax planning that sits underneath.

It is a plan built over years, not a decision taken at the point of leaving. Most take three to five years to execute properly because the things that make a business saleable, such as clean financial and operational data, documented processes, and a management team that can run it without the owner, cannot be built quickly. Owners who start late usually find the options have narrowed for them, or unintentionally restrict the valuation achievable.

Exit strategy vs succession planning

People often use these two terms interchangeably, but they answer different questions.

• Exit strategy: An exit strategy is about the owner: how they leave and what they take with them
• Business succession: Succession is about the business: who runs it next and whether it survives the handover

Passing a business to a family member can be both, but not always. A liquidation is an exit with no succession, whilst an owner who steps back from the day-to-day while keeping their shares has arranged succession without an exit.

Eight business exit strategies compared

The eight business exit routes below are not necessarily available or viable for every business. Some depend on having a successor, others on the business being sufficiently attractive to find an external buyer, and some depend on whether the company has the reserves or the profits to fund the deal itself. Our handy table sets out what each business exit option normally achieves, how and when the money arrives and how it is taxed.

We advise you to read the last two columns together. Tax treatment is often what separates two routes that look similar on price, and the suitability column explains why the highest-value option on paper may be less attractive in practice.

NB: This table is a starting point. Each business and owner is unique; economic and funding conditions change; tax treatment depends on individual circumstances. We recommend specialist advice is sought when considering the right strategy for you and your business.

HMRC’s helpsheet on BADR (business asset disposal relief) sets out the qualifying conditions in full.

1.    Trade sale (selling to another business)

Selling 100% share capital to another business – often a competitor, a supplier, or a buyer from an adjacent sector moving into the market – usually achieves the highest valuation.. These buyers can justify a premium as the acquisition brings strategic or synergistic benefits: access to a customer base or geography, a capability or product they would otherwise have to develop internally, or cost savings from combining the two operations. Most of the sale price is normally paid up front and sellers can exit relatively quickly once the deal completes.

The process is usually a little longer and more complex than the alternatives and it carries more risk; due diligence is intensive, and deals can fall over (proper preparation in advance mitigates this risk significantly). Smaller businesses, broadly those below £1m in operating profit, often find it more difficult to attract reputable buyers. That does not rule a trade sale out for smaller businesses, but it does mean testing the market appetite early rather than assuming a good buyer is there can save time, cost and heartache.

Tax treatment: capital gains tax on the disposal of share capital, with business asset disposal relief where the qualifying conditions are met.

Our business sales and acquisitions team can give you a realistic read on this before you commit to a process.

2.   Sale to private equity (PE)

Private equity can also deliver strong valuations for quality businesses in sectors investors favour. Most of the price is usually paid up front, and the structure often offers more flexibility than a trade sale. For owners who want to remain involved, it is usually possible to retain a smaller equity share, which can be worth significantly more in a future transaction as the business grows and is sold on by the equity house later.

Private equity firms are selective, though. Generally, they seek fast growth and a high return within a relatively short timeframe (hold periods are often in the range of 4-6 years). They need a credible business plan and a strong, more-or-less complete management team capable of delivering it. Where the owner is fundamental to the business, that could be viewed as problematic. For mature, stable, companies without a strong growth trend, this probably isn’t the best route.

Tax treatment: on disposal of shares, capital gains tax will apply to  the cash element. Any equity rolled into the new structure is taxed later, when it the shares are eventually sold.

3.   Sale to a family office or search fund

Two further third-party buyer types are often overlooked. A family office invests private family wealth in businesses, usually with a longer hold period than private equity. A search fund is a person or small team who have raised backing specifically to buy a business and run it themselves to generate a return for their investors.

Both can work where there is no family member or management team ready to take over and where a trade sale or private equity is difficult because of the characteristics of the business or simply unattractive to the sellers (for instance where preserving legacy or protecting the workforce matters more than achieving the highest price). A complete management team is not essential where the buyer will become an owner-operator.

These buyers normally offer real flexibility on deal structure and what happens after completion. The trade-off is price: the sale value is often lower than a trade sale would achieve and, a larger proportion of it typically arrives over time rather than at closing.

Tax treatment: capital gains tax will apply to the proceeds received on completion of the sale of shares, with business asset disposal relief available where the qualifying conditions are met. Deferred consideration  could be taxed at completion rather than on receipt, depending on how it is structured.

4.   Management buy-out (MBO)

An MBO allows existing employees (usually senior management) to buy the business, offering continuity and the assurance that it stays in known, capable hands. The buyer already knows the company, which tends to make the process smoother, diligence far less intensive, and the outcome more certain than selling to a stranger.

There is a common misconception that the management team  needs substantial personal wealth to make an MBO work. A mix of cash already on the balance sheet, external debt financing and (in the right circumstances) private equity backing can deliver notable value up front, alongside a modest personal investment from the team and usually some vendor finance that is paid down over time.

Valuations are usually lower than in a trade sale, as there’s no strategic rationale or synergistic advantage for the management team to instantly benefit from; and the business needs to be financially strong enough to service the debt taken on. That last point can be a  constraint: an MBO is funded largely out of the company’s own future cash flow (to pay down external and vendor debt).

Tax treatment: on the disposal of shares, capital gains tax will apply to the cash received on completion, with business asset disposal relief available where the qualifying conditions are met. Tax on loan notes and preference shares are treated differently depending on how they are structured, with the tax normally being deferred until they are redeemed  but elections could be available to tax them upfront. The difference is worth modelling before terms are agreed.

5.   Employee ownership trust (EOT)

An EOT is a discretionary trust that acquires and holds a controlling interest (more than 50%) in a business for the benefit of all its employees. Where the qualifying conditions are met, the sale can be achieved with only 50% of the proceeds chargeable to capital gains tax. Whilst the valuation is often lower than a sale to third party, this tax advantage means the net amount that ends up in the sellers’ pocket can be comparable.

The purchase is usually funded from trading cash flows and reserves; external borrowing can also be used, but funder appetite is more restricted than for MBOs. In practice, much of the price is often left outstanding as a debt owed by the trust to the sellers: the company pays future profits across to the trust, which then settles the deferred consideration over time.

Whilst the tax relief is generous and prompts many owners to look at this route, it should not be the primary consideration. An EOT suits some businesses far better than others: the staff and the culture need to fit the change in emphasis, as employee ownership only works if people engage with it; incentivising senior leadership can be difficult without equity to offer; and unwinding the structure later is complex, so it is a decision that is expensive to reverse. However EOTs, in the right circumstances, have been proven to incentivise the workforce to deliver strong results post-transaction as they have a vested interest, and the culture and legacy of the business is preserved.

Tax treatment:  where the relevant EOT qualifying conditions are met, 50% of the gain realised by the selling shareholders may be relieved from capital gains tax. The relieved gain is effectively held over by reducing the trustees’ base cost in the shares. The remaining 50% of the gain is chargeable to capital gains tax, and business asset disposal relief is not available on that chargeable gain. The relief can be withdrawn if disqualifying events occur within the relevant post-disposal period.

6.   Company purchase of own shares

Rather than finding a buyer, the company itself can buy shares from the departing shareholder and cancel them. The remaining owners’ stakes increase proportionately without anyone having to fund a purchase personally. This makes it a useful tool where no external buyer is available, where ownership is to stay within a family, or where the remaining owners would rather not bring in someone new but cannot afford to buy the shares themselves.

Strict conditions apply: the company needs sufficient distributable reserves and the cash to fund the purchase; the price must be market value, with an appropriate minority discount applied; and there must be no restrictions in the articles of association or any shareholders’ agreement that would prevent the buyback.

Capital treatment is more favourable than income treatment, but it is not automatic in such transactions. The conditions need to be worked through before the transaction rather than after.

Tax treatment: The default position is that the proceeds will be taxed as an income distribution unless certain conditions are met where the proceeds can be taxed as capital. Advance clearance is available and worth obtaining.

7.   Gift of shares

Where a family business is to pass to the next generation, gifting shares may be the answer but it comes with a major caveat: no consideration is received, so it is not an option for owners looking to realise value from the business. It is a way of passing on, not of cashing out.

A gift is still a disposal for capital gains tax purposes. That often catches owners out: a tax liability can still arise on shares handed over for nothing. Gift relief may be available, though, where the conditions are met.

Gift relief works by holding over the gain that would have arisen and transferring it to the recipient rather than cancelling it. The recipients’  base cost is reduced by that held over gain accordingly, and the exiting owner is left with no immediate capital gains tax liability; the gain resurfaces when the recipient eventually sells. It must be claimed jointly by both parties, and it applies only to shares in unquoted trading companies. Where the company holds non-trading assets, the relief can be restricted.

Where employees or directors are amongst those receiving shares, the employment-related securities legislation also needs to be taken into account, as it can trigger income tax charges depending on the circumstances.

Tax treatment: a disposal at market value for capital gains tax purposes despite no proceeds being received. Gift holdover relief may be available, and inheritance tax reliefs will also need to be considered.

8.   Members’ voluntary liquidation (MVL)

Where the owners need to exit and the business is not going to continue under new ownership, the company can be wound up. Trade ceases, stock and assets sold off, debtors called in and creditors settled, leaving a shell company with the cash remaining after winding down its affairs for distribution to the shareholders.

If this is done for genuine commercial reasons, distributions on a liquidation may be treated as capital rather than income, which is usually the more favourable outcome.

For small, solvent companies with straightforward affairs, an informal strike-off through Companies House may be enough. Where reserves exceed £25,000, an MVL is the usual route: a licensed insolvency practitioner is appointed to realise the assets, settle the liabilities and return the surplus. It costs more but people often prefer it precisely because of the capital treatment.

Anti-avoidance legislation needs careful review, especially if the owner intends to carry on a similar trade afterwards. With the right advice, though, liquidation can be a tax-efficient way to exit.

Tax treatment: distributions are usually treated as capital rather than income where the winding up is for genuine commercial reasons and the anti-avoidance provisions do not apply.

Read more on how MVL works and when it makes sense.

Find out more about business restructuring.

How to choose the right business exit strategy

Eight options are a lot to weigh up at once and most owners find the choice narrows quickly once they work through a handful of questions in the right order. Here are the main questions to think about:

1.   Do you have a successor?

Start here because nothing eliminates options faster. A family member ready and willing to take over opens up gifting and a share buyback. A capable management team makes an MBO or an EOT realistic. If there is neither, then the options reduce to selling externally or winding up. Be honest at this stage rather than optimistic. An heir who has never expressed interest is not a successor and a management team that has never run anything without the owner may not be the best option – if the business fails under their stewardship before the sellers receive their consideration in full, the unpaid consideration will likely be lost.

2.   How much do you need up front?

This is where routes separate sharply. A trade sale or a private equity deal delivers most of the value at completion. An MBO, an EOT or a family office sale defers a substantial part of it, sometimes over five years or more and payment usually depends on the business continuing to trade profitably. If retirement plans, a mortgage or another investment depends on a lump sum, the deferred routes carry a risk that needs pricing in. Again, the key is to think realistically: what do you actually need now to support the lifestyle you want, versus what can be paid later to support you in retirement or to pass on to the next generation?

Taking personal financial planning advice early can help set appropriate goals, which in turn can inform the timing of the transaction; if you can already exceed your aspirations, you can transact quickly, whilst if the business is not yet of sufficient scale to attract the price you need, you can put in place plans to grow it in the short-to-medium term.

3.   Do you want to stay involved?

Some owners want a clean break, while others find the prospect of leaving entirely more unsettling than they expected. Private equity, an MBO and a family office sale all accommodate continued involvement, and an EOT commonly sees the seller stay on. A trade sale rarely extends beyond a short handover, and a liquidation ends it outright.

4.   How big is the business?

Scale is a key factor in determining who might consider purchasing the business. Attracting a trade buyer with the resources to complete becomes difficult and private equity is unlikely to be interested at all if operating profit is less than £1m. MBOs, share buybacks, and EOTs do not depend on outside appetite in the same way, but you may need to consider (for example) the debt capacity and future cash flow of the business instead.

If you are unsure where you sit, a formal valuation will tell you what the business is actually worth rather than what it feels like it should be.

5.   Price vs legacy

For many family businesses this is a core question. The highest bidder is often a competitor who might absorb the operation, rebrand it and make redundancies. If what matters is that the name survives, that the staff who built the business keep their jobs, or that it stays recognisably the same company, then the best outcome may not be the highest valuation. That is a legitimate choice and worth making deliberately rather than discovering after the event.

When to start planning your exit

Ideally, at least three to five years before exit! This gives time to review current valuation and options, identify what is missing to make the preferred option work, and execute a plan to give you the best chance or realising your aspirations. Simply approaching an advisor at the time you want to exit rarely delivers the optimum outcome.

The transaction itself typically adds 4-6 months or more to the timeline, depending on the exit route chosen.

That sounds a long time until you look at what has to happen. Accounts need to be robust across several years because buyers price uncertainty into their offers. Processes need to be documented. And the business needs to be able to run without the owner. A company where the founder holds the client relationships and the technical knowledge is difficult to sell at any price. Where HMRC clearance is necessary or a buyer needs to raise finance, that adds time again.

None of which means an owner has left it too late. It just means the earlier the conversation starts; the more options stay open.

For what getting exit-ready actually involves, see ‘When and how to prepare for a business exit’.

Common mistakes when planning a business exit

Most of what goes wrong at this stage is a matter of ruling options in or out too early. Here are some of the most common errors when it comes to planning a business exit:

• Choosing a route before understanding the tax: The headline price and the net proceeds can differ substantially, and the gap varies by route. It is worth modelling two or three options properly before committing to one.
• Assuming a trade sale is available: It is the default assumption for most owners and the route most likely to be out of reach. Test buyer appetite early rather than discovering the answer two years in to your strategy – a good advisor can have anonymous conversations in the market to gauge appetite. Family offices and search funds can provide solid options where there isn’t a strategic trade buyer.
• Ruling out an MBO or EOT on affordability: Management don’t often fund a buy-out from personal wealth. Cash already in the business, debt finance and private equity backing do most of the work.
• Treating an EOT as the obvious answer because of the attractive tax regime: The capital gains relief is genuinely attractive but it is the wrong reason to choose the route. If the culture does not fit, the structure will not work.
• Assuming no buyer means no options: A share buyback or even a liquidation can deliver value where a conventional sale is precluded.

Your business exit strategy: get the route and the timing right

There really is no single best business exit strategy. There is only the route that best fits your business, your successor and what you want to walk away with; and the tax treatment that comes attached to it.

For most owners, the choice narrows quickly once the right questions are asked in the right order. Do you have a successor? How much do you need at completion? Do you want to stay involved? What matters more: the price or what happens to the business afterwards? The answers usually point somewhere, and the valuation and tax position then tell you what the route is worth.

We advise owners across the South and South West on exactly this, bringing corporate finance and tax expertise to the same conversation. If you are three to five years out or closer than that, get in touch and we can talk it through.