Exit strategy and business succession: what are your options?

When it’s time to exit a business, there are several options available depending on the circumstances. Owners may choose to sell to external buyers, pass the business to family members, or enable a management team to take over through a buyout. In some cases, the business may have run its course and winding it up becomes the preferred route. Each option offers different levels of control, tax efficiency, and continuity. The right approach will depend on the business’s financial position, future plans, and the owner’s personal goals. Common exit routes are outlined below to help guide the decision-making process.

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.

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.

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.

Company purchase of own shares

A company share buyback allows the business to purchase shares from an exiting owner, which can be useful when no external buyer is available or ownership is to remain within a family. Strict conditions apply: the company must have sufficient distributable and cash reserves, pay market value (with any minority discount), and ensure no restrictions exist in the articles or agreements. This option also works when remaining owners prefer not to introduce new individuals but cannot buy the shares personally. The shares are cancelled, increasing the remaining owners’ stake. Tax treatment may be capital or income, subject to meeting HMRC conditions.

Gift of shares

If the company is a family business and the owners wish to pass it to the next generation, gifting shares may be an option. As no consideration is received, it’s not suitable for those looking to realise value. A gift is still a disposal for capital gains tax purposes. This could result in a tax liability despite no proceeds being received. However, gift relief may be available if certain conditions are met.

Gift relief works by transferring the gain to the recipient, reducing their base cost and leaving the exiting owner with no immediate capital gains tax liability. It must be claimed jointly and applies to shares in unquoted trading companies. The relief can be restricted if the company holds non-trading assets.

Consideration should also be given to employment related securities legislation where employees or directors are receiving shares, as this may trigger income tax implications depending on the circumstances.

Management buy-out (MBO)

An MBO allows existing employees—typically directors and senior management—to acquire the business, offering continuity and reassurance that it remains in capable hands. Contrary to popular belief, substantial personal wealth isn’t required. A mix of cash on the balance sheet, debt financing, and private equity can provide significant upfront value, though MBOs often involve more deferred payments than third-party sales.

MBOs offer smoother processes, greater control for outgoing owners, and flexibility around future involvement or retaining equity. However, valuations are typically lower than trade sales, and the business must be financially strong enough to support the deal.

The typical structure involves the management team forming a new holding company to acquire the business at market value, without applying a minority discount. Consideration can be structured in various ways—cash, deferred payments, or loan notes—with different tax implications. Funding may also include dividends or loans from the operating company, alongside personal investment from the management team.

Employee ownership trust (EOT)

An EOT involves selling to a trust that 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 a management buyout. A high proportion of the sale price is usually deferred and paid over time from operating profits.

It is possible for the sale to be achieved free of capital gains tax, provided certain qualifying conditions are met.

An EOT is a discretionary trust that acquires and holds a controlling (>50%) interest in a company for the benefit of its employees. The sale is most commonly funded using trading profits and reserves, although external loans may also be used. The purchase price can be left outstanding as debt owed by the trust, with the company using future profits to make payments to the trust, which then distributes the deferred consideration over time.

Once the sale proceeds have been fully satisfied, further profits can be paid to the trust and distributed for the benefit of employees. This facilitates a tax-efficient exit while allowing the business to continue with employees sharing in future success.

However, an EOT is not simply an exit route. The staff and culture need to fit the change in emphasis. Incentivising leadership may be tricky without equity, and unwinding the structure in future is difficult.

Voluntary liquidation (MVL)

If the owners wish to exit and do not intend for the business to continue under new ownership, the company can be wound up. If done for commercial reasons, distributions on winding up may be treated as capital rather than income.

For small, solvent companies with straightforward affairs, an informal process can be followed by applying to Companies House to strike the company off. If reserves are below £25,000, distributions may be treated as capital.

Larger companies with reserves over £25,000 typically use a members’ voluntary liquidation. A licensed insolvency practitioner is appointed to realise assets, settle liabilities, and return surplus funds. Though more costly, this route is often preferred for tax purposes, as distributions are usually treated as capital.

Anti-avoidance legislation must be reviewed carefully, but with the right advice, liquidation can be a clean and tax-efficient way to exit a business. Find out more here.

How to choose an exit strategy

There is no one solution that is right for everyone, and there are many factors to be taken into account. The ideal exit strategy depends on your objectives and the company’s financial position. Whether you are looking to realise value they’ve built up in their business, retaining ownership in the family, or walking away from the business entirely, careful planning and advice from tax professionals can make a world of difference.

Engaging with tax and 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.