Exit options – Last Friday blog
Welcome to the first “Last Friday Blog”, a monthly blog aimed at the Owner Managed Business (OMB) sector covering a wide range of topics from taxes, shares, investment, financing to administration and beyond.
In this month’s blog, we are starting where we intend to finish and heading for the exit.
When I talk to my clients about their exit plans and strategies, you come across a wide variety of replies from the “well that’s years away!”, “I don’t want to talk about that yet” to the “I’m nowhere near ready for that” and on the odd occasion we do get the “well I’ve been thinking…”.
It’s easy to think that the “well I’ve been thinking…” is the best answer and the one I’m looking to receive. Well, in some circumstances that can be true, but here at BHP we don’t work by being reactive to those that are ready to exit as sometimes this can be too late and therefore planning is limited. Instead we want to be proactive and change the mindsets of those thinking “I’m nowhere near ready”.
Let me explain…
Just like when we talk to clients about their 5 year business plan, cash flows and goals, at BHP we are already thinking far beyond that. Here at BHP we are thinking about the bigger picture… the future.
By working closely and regularly with our clients we get to understand what they want from being in business, what are they trying to achieve by taking the risk of running their own company and what every stage of business looks like to them and by when do they want to achieve those goals?
When the time is right, we ask the right questions about exit. That’s why we don’t want the answer “well I’ve been thinking…”, because asking the question a long time before they are ready means we’ve already done the thinking.
See, planning for an exit takes time and in some cases lots of it. It takes the understanding of what is trying to be achieved, how quickly, who might the potential purchaser be? Is there a next generation in the pipeline to take over the company? Is there a management team primed to takeover? Is it a simple wind-down and liquidation of the company or is the company going to be groomed for a full 3rd party sale?
If the question of exit is raised at the right time, there is simply no right or wrong answer, but having the time to put a plan in place means that all of the options above (and more) are available, whereas these can become restricted if there isn’t enough time to plan.
So just to get you thinking, here are just a few of the options for exiting a company:
Now I know share schemes don’t directly exit you from a business but stay with me. Share Schemes are one of the best tools we have to tax efficiently plan for a future exit.
Have you identified those key members of the management who you think may be primed for a Management Buy Out (MBO)? Well share schemes, especially the Enterprise Management Incentive (EMI) Scheme can be a brilliant way of carrying out the first steps of a management team taking over.
An EMI scheme allows employees to be awarded the right to exercise shares in a company at a future date when certain targets are met and can in certain circumstances be granted at a reduced value.
I’ll not go into detail on share schemes here as this will be picked up in a later blog. However, if your key management can be awarded shares tax efficiently, they can start to learn how to effectively run a company and set them up ready to take over ownership when you guessed it… you are ready to exit.
Company Purchase of Own Shares (CPOS)
A CPOS can be the perfect exit option for those looking to exit or retire from a business that has the cash available in the company or the financing available to purchase the share of the outgoing shareholder.
As the name suggests, the company effectively repurchases the shares back from the exiting shareholder and cancels them, meaning the shares held by the management team above gives them full ownership of the company.
Ofcourse, a CPOS can also work in a simpler situation where you have a retiring, or even disgruntled shareholder wanting to exit where shares are already historically owned by other shareholders.
The benefit of a CPOS is that shares don’t have to be sold to a 3rd party where this is not desired by the remaining shareholders and is a relatively simple transaction.
The downside can sometimes be that cash has to be paid on completion and therefore either cash or financing has to be available.
Don’t have the cash or financing? Don’t worry, we have another option…
So, we have a shareholder wanting to exit, a management team or existing shareholders in place but the cash or financing isn’t available to make the repurchase.
This option involves the insertion of a NewCo above the existing company. I’ll not get technical here, but this option allows for existing shareholders to exchange the shares tax efficiently for NewCo shares while allowing the NewCo to purchase the outgoing shareholders shares on deferred terms, as agreed when cash and financing allows. Again, this leaves the management team or existing shareholders with full control of the company.
Liquidation & Winding Up
So, we’ve discussed some options of a management or existing shareholder carrying on the business but what if the company has come to the end of its life and is ready to be closed down? Well, we always have the option of putting the company into liquidation and distributing the net assets to the shareholders.
The benefit of this route is the distribution of net assets is still taxed at much lower capital rates and where planning is in place this is a good option for building up reserves in a company to be taken out at the lower capital rates rather than being distributed as dividends.
Again, it’s all in the long term planning.
The Next Generation
Is there a next generation you see as the future of the business? If so, the CPOS/NewCo route above could be the way to go.
However, where family is involved we often see shares being gifted where the exiting shareholder doesn’t require the full value, and this can be done tax free if completed correctly.
Sometimes we see a half way house where some shares are sold via a CPOS and some gifted.
You’ve got it, it’s all in the planning and understanding the ultimate goal.
There are many other options available for an exiting shareholder including the “standard” 3rd party sale and again this will form a blog post at a future date on how a company can be groomed for sale and we haven’t even started to talk about the more complicated planning including entities such as Employee Benefit Trusts (EBT’s) etc.
What I hope to have got across is that planning is key, and that thinking about the end is certainly not be done at the end, but far from it.
By having the discussion about the end, it can be just the beginning and bring all different areas of efficient planning together.
So now, I hope you will look forward to the “Have you thought about your exit” question. It makes for some exciting conversations.