An exit from an owner managed or family business can take a number of forms.
There are many dynamics at play covering things such as suitable and willing family members to take the reins, a competent management team, the availability of funding, some quite heavy duty tax issues and the emergence of a third party purchaser whether in the form of a trade purchaser or a private equity purchaser.
This article briefly overviews the options and some of the key terminology.
Succession involving family members
Approximately one third of UK family or first generation businesses transition to the second generation. Providing that consideration is not being paid to the exiting family member, the legal and tax implications of such a process should be relatively straightforward, although issues such as change of ownership provisions in banking documentation or key contracts require to be considered and can easily be overlooked.
If, on the other hand, there is to be consideration paid to the outgoing family member, more detailed legal and tax advice will be required and most likely once the plan has been agreed, tax clearances will be required. One of the more difficult tax aspects of recent years has been the Transaction in Securities legislation which has caused the re-engineering of many transactions and adds an unwelcome layer of delay and complexity.
Management Buyouts (MBO)
If there is no family member to take up the reins, MBOs are quite common. There are a couple of particular varieties of MBO mentioned below. An MBO will often involve setting up a new company which can be beneficial from a tax perspective if there is an element of deferred consideration and again there are some quite complex tax issues to consider.
Vendor Inspired Management Buyouts (VIMBO)
Vendor Inspired Management Buyouts (VIMBO) have been on the increase as vendors wish to see the preservation of the business beyond retirement and are prepared to accept what is usually a substantial element of deferred consideration on relatively soft terms. Often a VIMBO package is pulled together by the seller and presented as a package to the management team. The normal form financially would be that there is some form of consideration at completion with a larger than normal deferred element. The benefit is usually a 10% tax rate for the seller but with a sharing of risk were the business to fail.
Buy In Management Buyout (BIMBO)
BIMBO would involve the management team finding an equity partner to come in with them on a purchase. The financial terms would ordinarily be better than on a VIMBO but there may well still be a significant element of deferred consideration.
Employee Buyouts are worthy of consideration and have similar features to a MBO and its variations. The additional layer of complexity is the sheer number of participants whose expectations require additional management and co-ordination through the process. There are some very good external resources available to assist with such a buyout.
The most obvious route is a sale to a competitor or as a bolt on to a complimentary business. For the uninitiated, there is a whole new world of issues involved in this process including warranties and indemnities which apply after the sale and could result in what is in effect a retrospective adjustment to the price. A key area of focus for the seller’s solicitors is to limit the scope of these warranties and indemnities as much as possible. The market position on these limitations has moved and continues to do so and so it is fundamental to appoint advisers with up to date experience in this area gained from cross border work.
Private Equity (PE) Sale
PE houses appear to be sitting on a very substantial weight of money at present having been through a cycle of disposals of portfolio companies of late. There is a requirement to produce returns to their investors on this money and, as a result, PE houses are keen for acquisitions at present. As a general rule, PE houses look for businesses of a particular scale with strong cash flows and so not every business will be appropriate for this type of exit. They are usually quite formulaic in their approach to deals and have investment criteria to be met. They are however experienced purchasers and once past the heads of terms stage, our experience is that they are able to complete relatively quickly on their transactions.
Earnings Before Interest Taxation Depreciation and Amortisation (EBITDA)
A brief word about EBITDA: This is a key metric which a purchaser and its advisors will use to value a business. It is essentially the profit adjusted back to disregard the particular circumstances around funding etc. so that businesses can be compared on a like for like basis. A multiplier is usually applied to EBITDA to arrive at the valuation, with the multiplier commonly being between two and 15 times EBITDA. In technology deals, particularly where there is a west coast USA purchaser involved, rather than a multiple of EBITDA, our experience is that a multiple of revenue is used as the valuation basis with the multiple being determined by the rate of growth of the business.
Business Law at Turcan Connell
Turcan Connell established its business law team in 2011, with a focus on assisting business owners exiting from their business. The process can be all consuming and having quality advice which is in tune with and tailored to the needs of owner managers is vital. We have assisted in all of the above types of transaction in a wide variety of industries covering food and drink, technology, energy, transport, business services, retail, leisure, manufacturing. As well as having sold businesses to UK based buyers, we have experience in selling to US, European and Chinese purchasers each with their own approach to dealmaking. Although we cover a very wide range of transaction sizes, the typical size of our transactions in terms of price payable is in a range of £2m- £50m.