Exit strategy and business succession: what are your options?

Succession planning is important for all business owners. It helps ensure business continuity, protect family wealth and achieve personal and professional goals.

What is an exit strategy?

An exit strategy is a planned approach to transitioning ownership and control of a business. It outlines how an owner intends to leave the business, whether through sale, succession, or closure. A clear exit strategy ensures continuity, maximises value, and reduces the risks associated with sudden or unplanned exits.

What is the timeline for exit planning?

It’s best to start exit planning two to five years before you plan to leave the business. This gives you time to address operational, financial and legal matters.

Which is the best exit strategy?

The best exit strategy depends on the business and the goals of its owners. Some common options include:

1. Trade sale (selling to another business)

This option often achieves the highest valuation. Buyers can justify a premium due to the strategic and/or synergistic benefits of the acquisition. Most of the sale price is usually paid up-front and sellers can exit quickly.

However, the process can take longer and be more complex than other options. It also carries more risk. Smaller businesses (sub-£1m operating profit) may struggle to attract a buyer with the enough resources.

2. Sale to private equity (PE)

This option can also deliver strong valuations for quality businesses in popular sectors. Most of the sale price is usually paid up-front. It can offer more flexibility to sellers who wish to remain involved after the sale, including the possibility of keeping a small share in the business.

However, private equity firms are selective. They want fast growth and a high return on their investment in a short timeframe. They usually need a solid business plan and a strong management team already in place. This option is often unsuitable for mature, stable, family-owned businesses.

3. Sale to a family office or search fund

This can be a good choice if there’s no family member or manager ready to take over and selling to another business or private equity is difficult. This could be due to the characteristics of the business, or undesirable (for example, where preserving legacy or protecting the workforce is a priority). A full management team in place is often not needed.

These buyers usually offer a high degree of flexibility around deal structure and sellers’ post-transaction involvement. However, the sale price is often lower, and a large part of the payment may be delayed and paid over time.

4. Family succession

This can happen in different ways. It might involve an MBO-style transaction (considered below) involving family or pure gifting of the business to the next generation. Family succession can preserve legacy and culture. It can offer greater protection to the workforce and retain family wealth, whilst still giving options for the sellers to extract sufficient value to support them through retirement.

5. Management buy-out (MBO)

Contrary to popular belief, management (which may include family) does not need a pot of gold to acquire the business. Cash on the balance sheet plus debt or private equity funding can enable significant value to be paid up-front. However, generally there are higher proportions of deferred payments than in a sale to a third party.

MBOs offer continuity, smoother processes over which the sellers can retain greater control, and the greatest flexibility around the sellers’ future involvement and retaining equity. However, valuation is typically lower than a trade sale. If funding is required the business must be able to support it. Highly-leveraged businesses or those with cash flow issues may struggle to finance payments to the sellers.

6. Employee ownership trust (EOT)

This involves selling to a trust which runs the business for the benefit of all employees. Valuations are typically modest, and although debt funding is available, options are more limited than for an MBO. A high proportion of the sale price is therefore typically deferred and paid over time from operating profits.

The sellers benefit from a capital gains tax relief which reduces the tax rate on proceeds to 0% – a clear benefit, often offsetting the lower headline price. However, an EOT is not simply an exit route for owners. The staff and culture needs to fit the change in emphasis, incentivising leadership may be tricky without being able to offer equity, and unwinding or exiting the structure in future is difficult.

7. Voluntary liquidation (MVL)

However, it can still be a good option—especially if the business owns valuable assets. In some cases, it can still generate significant tax-efficient returns to shareholders.

So…which is the best?

How to choose an exit strategy

Choosing an exit strategy involves assessing personal goals, business readiness, and market conditions. Owners should consider their desired level of involvement post-exit, the financial needs of them and their family, the capabilities of potential successors, and the timeframe in which they need to execute a deal.

Tax planning is crucial, particularly with recent (and potential further) changes to capital gains tax and inheritance tax – tax legislation around deals is complex, with numerous pitfalls to avoid and reliefs to take advantage of.

Engaging with corporate finance advisors for a detailed Options Review can provide valuable insights into valuation, likely buyer or funder appetite, deal structuring options, the value sellers need to achieve to provide their desired lifestyle, and tax implications. This review can help shape the right exit strategy for you.