What are the options for retiring when you own your company?
Whilst the concept of retirement has become somewhat fluid in recent years, for most people who are employed by companies, large and small, retirement comes on a date which has been set and planned for some time in advance, often many years. Retirement apart, should employees, senior or junior, wish to have a change of direction in their career, it is simply a case of giving a few months’ notice.
For business owners, it is not quite that easy. Retirement involves extensive planning and possibly some key decisions well in advance. Who will take over the running of the business? Who will deal with your clients? Who will look after your staff? How will you extract the value you have built in the business over the years? In most cases, owners of SME businesses, who take an active role in their companies, cannot simply name a date and leave.
Whatever exit route you take, there can be many bumps and false starts along the way. With any type of sale, the process is dependent on multiple parties aligning and agreeing to a transaction.
So, what are the options?
- Develop a management team, with systems and processes in place such that you do not need to take an active role day to day.
Depending on the scale of your business, employing senior staff may eat into your profits and you will need to make sure they are committed to the company’s ongoing success. But if you get it right, being able to step back from the business will not only free you to do more of what you want to do, it will enable the business to grow in profitability and be worth far more in value.
The responsibility of ownership remains however and at some point, you will need to pass on the baton.
- Sell your business to your management team
This is known as a Management Buy Out (MBO). These deals work best for businesses which are of sufficient scale to have a full Tier2 management team in place who have worked for the company for several years but are not of retirement age themselves. They will need have the ambition and support from their families to be business owners themselves. As such they will often need to have the means to put funds into the company and be prepared to take on financial risk and responsibilities for running the company well into the future.
Normally business owners have a good feel for whether the management team has the appetite for an MBO, but it is worth assessing this carefully before entering into MBO discussions as it can be very destabilising for a business if discussions are entered into with the management team and then the MBO does not come to fruition.
- Sell your business to your employees
This is an exit route which has become more popular in recent years. Essentially the business owner sells the company to an Employee Ownership Trust (EOT) which will need to form its own board, typically made up of employees and some external parties with board level experience, who will oversee the management team/board of the company. Again, these deals work best for businesses which are of sufficient scale to have a full Tier2 management team in place.
There are tax incentives for EOTs for both the retiring business owner and employees, but deal structures tend to be paid over a longer period of time, and there can be restraints on the company raising finance for growth/acquisitions or even being acquired down the line. The driver for going down this route is normally based on leaving a legacy for the local community and staff.
- Sell your business to a third party
Depending on the scale of your business, third party sales can be to individuals/groups of investors, Private Equity or ‘Trade’ buyers. Whether individuals or trading companies, they will need to have sufficient cash funds and be backable by Private Equity and/or financial lending institutions. Whilst having a full Tier2 management team in place will put you in the best position to achieve optimum value and deal structure, this route also allows for new management to be brought in externally post sale.
- Close the business
Somewhat of a last resort means to achieve retirement, and not one we see very often. It tends to be a route for very small businesses which are reliant to a large extent on their owner. However this option offers a defined process and timeline for the business owner to exit.
Please have a look at our comparison of MBO vs EOT vs Business Sale routes for a deeper view of the pro’s and con’s of each option.
Conclusion
Whatever option seems most suitable for your situation, the challenge is always succession. Answer the question of succession and you will achieve a successful exit on your terms and desired timescale.
At Hornblower, we are always happy to discuss your plans for the future, looking at all the options for your exit as well as providing a free indicative valuation. Whilst our business is about selling businesses, we help you decide whether a business sale is right for you and your business before you engage us. Do get in touch to arrange a chat.
