For business owners, it is never too early to consider the best options for selling (also known as “exiting”) in the future. When it comes to selling a business, there are lots of options; however, there is no single “best” option. The right sale or exit will depend on the business type, its size, its industry, and market conditions, as well as your goals and those of your management team.
This guide will introduce you to several of the most popular ways to sell a business (or “exit strategies”), including when they might be a good or a bad idea.
Table of contents
| Management Buy-Out (MBO) | Jump to section |
| Employee Ownership Trust (EOT) | Jump to section |
| Trade Sale | Jump to section |
| Management Buy-In (MBI) | Jump to section |
| Initial Public Offering (IPO) | Jump to section |
| Voluntary Liquidation | Jump to section |
Before starting any business sale or exit process, we recommend consulting with a qualified Corporate Finance professional before making any decisions. The process can be complex, and there may be strong options you aren’t yet aware of that an expert can advise on.
Management Buy-Out (MBO)
A management buy-out (MBO) happens when a company's existing senior management team acquires a controlling stake in the company from its owners.
When is it a good option?
An MBO is an attractive prospect for an experienced and motivated management team with a real strategic vision for how the company can grow and develop in the future. From the perspective of the existing owner, it means they can exit the company and leave it in the capable hands of the people who know how to run the organisation well.
When is it not a good option?
An MBO might not work long-term if the management team lacks the leadership experience to excel in the role of owner and drive the business forward. Furthermore, the management team that is looking to take over will also need to have the appropriate appetite to consider taking on the necessary funding or finance options to buy the shares.
Employee Ownership Trust (EOT)
An employee ownership trust (EOT) is a model of business ownership introduced in 2014. It is a trust that is set up to acquire a controlling stake in a company for the benefit of all employees. In effect, it is a type of indirect employee ownership, allowing employees to benefit from the company’s success, and have a say in how it is run.
When is it a good option?
EOT is growing in popularity due to its range of benefits for the exiting owner, the employees, and the business overall. It provides the owner with the certainty of exit in a clearly defined time frame, the full market value for their shares, and the option to exit more gradually for better succession planning.
For the employees, EOT is an effective way to motivate and retain talent, as they are directly rewarded for the success of the company by way of tax-free annual bonuses.
When is it not a good option?
For all the benefits of an EOT transaction, it is not the best option for every business. To start with, transitioning to an EOT is a relatively complicated process that requires lots of legal and accounting advice. The costs associated with this can price out some very small companies with fewer resources available.
The departing owner may also need to be remunerated through deferred consideration; they may need to be paid back gradually. This means they will not get the full value of their shares right away, making EOT a less attractive option for owners who just want a quick exit and payment.
Trade Sale
When a business is sold to a third party, this is known as a Trade Sale. It may also be known as an acquisition or company sale. In principle, a trade sale is among the most straightforward options to sell a business, with ownership and control of a company being transferred to the buyer.
When is it a good option?
A trade sale may be a good idea if the retiring owner wishes to maximise the amount of money they make from the sale. A motivated trade buyer may be willing to pay more than the market value for the shares. From the perspective of the business, third-party ownership can bring in valuable new resources, experience, and personnel, which can help the business grow.
When is it not a good option?
For a trade sale, complexities can arise through sale negotiations, for which legal and accounting professionals will be required. From a strategic perspective, the buyer will generally want to undertake a time-consuming due diligence exercise and may need access to commercially sensitive information before the sale completes.
Finally, it is important to consider the potential impact of a trade sale on employees. New third-party ownership of a business can create uncertainty for the future and may put jobs at risk depending on the intentions of the new owners.
Management Buy-in (MBI)
A management buy-in (MBI) is a type of business sale where an external management team, or group of investors, is brought into the business to take over its ownership.
When is it a good option?
An MBI might be a good option if it enables the business to bring in people with lots of experience, or who are better suited to run the company than the existing management team. The external leadership team may be able to bring new strategic ideas, relationships, and other opportunities with them. In some cases, the MBI can also bring in additional capital to help fund new projects, initiatives, and investments.
When is it not a good option?
Potential issues with an MBI may arise if the new management team lacks the optimal industry experience to lead the company forward effectively, or if their goals are at odds with those of the company. There is also potential for friction between the new leadership and the existing team members if they are not culturally aligned.
Initial Public Offering (IPO)
An Initial Public Offering (IPO) is a process by which a company that is privately owned offers its shares to the general public. The company would then be a publicly traded company. For this to happen, the shares must be listed on a stock exchange where they can be traded by investors.
When is it a good option?
An IPO can benefit a company in many ways. It can be a good option for companies looking to raise capital to fund growth, and the company’s public profile and visibility can be enhanced by going public. This can help attract new business partners and customers.
When is it not a good option?
The process of an IPO can be complex and costly to set up, requiring lots of time and resources to properly prepare and execute. It should also be noted that an IPO may expose the company to greater regulatory and public scrutiny, creating more compliance and reporting obligations.
In reality, an IPO is only suitable for a very small percentage of companies.
Voluntary Liquidation
Voluntary liquidation, or “voluntary winding up” is when a company is closed down of its own accord. The company is terminated, and a liquidator will be responsible for selling off the company’s assets, settling its debts, and distributing any remaining funds to shareholders.
When is it a good option?
Voluntary liquidation is not a decision to be taken lightly, but it may be the appropriate path for companies that have reached the end of their intended lifecycle. It may also be the right option for companies that are no longer financially viable. For business owners, it can also help protect them from the company’s debts and liabilities.
When is it not a good option?
If the company is still viable and may continue trading profitably in the future, then voluntary liquidation is not recommended. More appropriate paths could be refinancing or restructuring. Voluntary liquidation should be carefully considered, with appropriate legal and financial advice given.
Speak to Shorts to ensure you sell your business the right way
Choosing the right advisor is crucial when it comes to selling your business, as it is one of the most significant transactions you will make after dedicating years, or even decades, of time and investment to its success.
The Shorts Corporate Finance team can guide you through the sale process and help you choose the best options and the most appropriate advisors for the sale.
Our team has decades of combined experience in advising on business sales of many types, and we pride ourselves in providing a personalised, award-winning service. We will apply our wide-ranging knowledge to help you achieve your desired outcome.
Tags: Corporate Finance, EOT
