‘It might feel like ‘Groundhog Day’ but the second UK Lockdown might be an ideal opportunity to think about your own eventual exit. What will that look like and what will be your plans afterwards? Would you like to stay around or do you favour moving on sooner rather than later? – Would you like the option? As five of our clients discovered in the spring lockdown, an Employee Ownership exit represents a practical and accessible route to selling your business, with many benefits for owners, employees and the business as a whole. A poor trading year in 2020 need not be the barrier to sale that you may consider it to be.’
Right now, many UK business owners have endured the ‘unique’ set of challenges thrown up by the first lockdown of 2020, suffering major and possibly lasting damage to their business only to be faced with a second lockdown just as things looked to be returning to some semblance of normality. Many owners, particularly those in their mid 50’s and older in our experience have, as a result of the events of 2020, accelerated their longer-term planning as it relates to themselves and by extension their business. Could this be a good time to consider your exit plan?
Many business owners have a vague idea of where their efforts are ultimately leading, but not necessarily with a precisely defined destination or timescale. The plan could involve selling the business to a competitor or other interested third party, a sale to the management team, passing the business to a younger family member or for some, sadly perhaps, a winding-up of the venture.
Some owners will have progressed further in their thinking and either on their own or with assistance, started to plan for their eventual separation from the business. For a myriad of reasons – personal (age, enthusiasm and energy) or business-related, there will come a point at which this separation has to become reality. There is a ‘certainty’ that as Founder and Business Owner, you will at some point be outside of what you have created and grown. Far better therefore to plan and to control events as far as you can and to have the best opportunity of ending up where you want to be with the kind of financial resources you need for the next chapter in life.
So as a business Owner, have you got a plan?
This second lock-down might prove to be a good opportunity to consider your long-term options.
- Transfer the business to another family member – indeed is there anyone ready, willing and capable to take over?
- Look at a sale to an existing manager/management team (Management Buyout) – Are they capable of running the business? Have they the financial resources to commit or can they secure funding? Would you need to accept payment from them over a period of time and in that scenario would you accept that they will exercise control over the business whilst you are still owed money?
- Consider a trade sale as the most appropriate way forward? On the face of it this is a straightforward and ‘clean’ option. Timing might be an important factor to ensure that your venture maximises its value so that you are not ‘hostage’ to market and competitive conditions at the time you wish to exit. You will also need to check how much tax you will pay as the lifetime allowance for ‘Entrepreneurs Relief’ changed recently.* It is likely that a buyer will want you to remain involved for a period after the deal is done and additionally, your rewards (price paid) are likely to be related to the business performance for a period after the sale, typically at least 12 months, often considerably longer – are you happy to do that?
- Sell to a ‘financial’ buyer for example Private Equity. Many of the same considerations apply as for a trade sale described above
- Sell to your employees via an Employee Ownership Trust (EOT) This route is possibly the least understood of all the options but can be very attractive for a number of reasons and continues to grow in popularity.
A sale to an Employee Ownership Trust is becoming more popular for many reasons but in summary the sale can makes sense for owners and employees:
The business owner is able to sell the business. This is not a trivial point. This type of sale is open to business owners even when other types of sale are not possible, either because buyers are unavailable or inappropriate or perhaps the price or conditions are unacceptable. The business valuation includes distributable cash reserves and a qualifying sale is completely free from Capital Gains Tax*. The process is more under the control of the business owner relative to other routes and there is no need to share sensitive information with competitors. The business is sold for a fair price as determined by an independent valuation.
From an employee perspective, the employee-owned business is focused on delivering benefit to the entire employee base and current legislation allows each employee to be paid up to £3600 per annum as profit share free from tax. Employees appreciate being more engaged in the business.
How does this work and what exactly is an Employee Ownership Trust?
The buyer of the business is a ‘Trust’ – a special type of company set up for the purposes of purchasing the business and ensuring the business is run for the benefit of all employees. The trustee board usually comprises independent directors as well as employee representation and the owner (usually for at least the time until they are fully repaid). The business owner is repaid the proceeds of sale over a period of time, all sums being free from Capital Gains Tax* – a notable benefit for an owner relative to other routes.
The owner can choose to stay an active employee of the company during (and potentially after) the period he is being paid back and until he is fully repaid he would usually be a trustee of the Trustee company with certain rights over what the company can and cannot do until repaid.
Many business owners from our experience appreciate the stability, certainty, and opportunity that the EOT sale gives them. Whilst not necessarily ready to retire immediately, they can plan their departure a number of years ahead, continue working if that suits them, focusing on furthering the business and maintaining the culture they have built. They can help drive succession planning and develop loyal employees into positions of increased responsibility.
Why not make the most of the current situation and give some thought to your own eventual exit – What does it look like and realistically how far in the future is that? Employee Ownership represents a practical and accessible exit route with many benefits, although RVE can help you with any of the other options you may wish to consider.
We would love to hear from you and discuss, contrast and financially-model the option of Employee Ownership along with any of the other alternatives.
* As of 11 April 2020, the lifetime allowance for Entrepreneurs Relief was reduced from £10m to £1m. The first £1m of Capital Gain on the sale of a business subject to qualifying criteria, is taxed at 10% and the remainder at standard Capital Gains Tax rate (20%). As from 2014, a sale of shares to an Employee Ownership Trust attracts Capital Gains Tax at a nil rate, and there is no upper limit for this relief.