An exit strategy needs planning
The following article by Clare Richards was published in the East Anglian Daily Times Business Column on 26th August 2014:
Shareholder exit strategy – some long term planning
In a successful owner managed company, there’s likely to be a point when the shareholders want to exit and realise the capital value of their shares.
There are various ways in which this could be achieved. For example, the shareholders could sell some or all of their shares; the company could sell some or all of its business; or the directors could carry out an orderly winding down of the company and then return capital to shareholders.
The detail of each different option will vary but some generalisations can be made. Shareholders can hope to maximise capital return by forward planning and action. Here are some suggestions:
- Make sure the business is fit to sell. A prospective buyer will almost certainly investigate the business. A buyer will expect long term and important contracts to be in writing. Check the business has adequate employment contracts and policies. Review the business’ standard terms of business. Consider whether appropriate management accounts and other financial information are available. If there are any obvious deficiencies, try to sort these out before you embark on an active sale process.
- Think about prospective buyers. If there is an obvious possible buyer, keep an eye on it. If it embarks on an acquisition programme, be ready to bring your plans forward.
- Is there any possibility of a management buyout? If so, think about where the funding for this might come from. Managers typically need to borrow to buy and sellers sometimes help with this. The outgoing owner could, for example, sell in instalments or even make a loan to the managers to fund some of the purchase price.
- If not all shareholders want to exit, think about whether it might be appropriate for the company to buy the relevant shares. If this is the long term plan, consider whether it is a good idea to try to build up some reserves within the company to enable this to happen.
- Consider whether there are any non-core assets in the business. If so, you may achieve a higher return by selling these separately.
- Talk to your professional advisers. They are likely to be heavily involved in the exit arrangements. Check that they are experienced in this kind of work. If not, or you want to appoint someone else for some other reason, try to get recommendations and meet prospective advisers. It is quite common for specialist advisers to be appointed, whilst retaining existing advisers for day to day advice.
Be aware that even preliminary steps towards exit can have significant tax or other consequences. You should therefore talk to your solicitor and accountant as soon as possible about your plans.
Clare Richards is a specialist in corporate law at Barker Gotelee, Solicitors in Suffolk.
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