Current trends for company sales of owner-managed businesses
In spite of current uncertainties in the market place, business owners continue to be actively focused on realising value for their investments. A transaction to unlock value is highly likely to be a way forward to achieve profitable realisation.
Tim Sadka, Partner in our Corporate & Commercial team, outlines current trends that business owners looking to sell their business should be aware of.
Who are the likely potential buyers?
Existing management team, competitors or investors.
Route to follow
Is the priority to achieve the highest price and/or to protect the business for future generations?
For family-owned businesses where the next generation does not want to enter the business, or for owner-managed businesses where one or more of the owners is contemplating retirement, employee share schemes can provide stability and clarity over the company’s future ownership.
A management buy-out can also provide an alternative exit. If the business has key employees who have the right leadership and management skills, such employees can be allowed to buy-in on favourable terms under the auspices of a tax-advantaged share plan or as key shareholders of a new company formed to acquire the business.
For those owners wishing to sell tax-efficiently, indirect ownership allows them to realise uncapped tax-exempt capital gains if a controlling interest is sold to an eligible employee trust, to provide enduring ownership of the business for the benefit of its employees.
Recruitment and retention
Employee share schemes have been shown to help attract and retain talented employees.
Increased employee productivity
Employees know they can enjoy a meaningful reward if they help generate business growth and increase profits. Research has shown that companies with employee share schemes tend to outperform others, both in productivity and growth, during both boom times and recessions.
Popular options for a sale:
- A Trade Sale could be the best route to maximising value provided a competitive process is possible and managed professionally. Ultimately, a trade sale may be to a competitor, or an investor looking for a route into a sector, geographical reach or customer base.
- A Management Buyout is a popular choice, particularly if you have a young, talented and ambitious management team. Some also consider it the most likely route to a smooth transition, enabling continuity for staff and customers. This is likely to need financial backing, such as from a private equity house, along with investment from the board.
- Taking the business into the control of an Employee Ownership Trust can be a way of ensuring more continuity for the business and its customers, realising value for the owner and providing staff with a stake in the business’ future.
- A Stock Market Flotation, or initial public offering, can be very financially rewarding if you have a high-growth, rapidly expanding business. Shareholders often retain a financial stake post flotation or initial public offering. Outside London, flotations are the exception not the rule.
- Partial Exit by sale of a minority or controlling interest, to a complimentary business or to private equity investors. More complicated but can be a way forward, especially for shareholders who want to convert some of their shareholding to cash but are not ready to walk away from a business completely.
Advantages and disadvantages of Employee Ownership Trusts
For some owners Tax Savings will be a driver, provided HMRC criteria are met. Where shareholders sell at least control to an Employee Ownership Trust (EOT), the sale proceeds will not be subject to a Capital Gains Tax charge, an effective Tax Rate of % on the proceeds. Employees benefit from Tax Concessions associated with the indirect ownership method, up to £3,600 of tax-free bonus can be paid from the trust to each employee, each year. For those employees who own shares directly, a new nil rate of tax applies to dividends of up to £5,000 per year. This provides an opportunity for low-level, tax-free profit-sharing. The added attraction is that selling shareholders can be trustees of the EOT and can also continue to be involved in the management of the business, which may be appealing to business owners who are not pursuing a traditional exit strategy and have a holistic vision to preserve a business sustainably and owned by the employees. While employees can own shares in a company that has an EOT, any interest the employees have in shares held by the EOT is not a direct interest and such EOT shares cannot be credited to and sold by an employee. EOTs are regulated by a trust deed and often a traditional sale of the company down the line by the EOT is not a likely short- to medium-term outcome, so exit value for employees is not readily foreseeable.
Advantages of a stock market flotation
Gives access to new capital to fund development of the business, creating a market for the shares and potentially making it easier for founders and other investors – including private equity/venture capitalists – to realise their investment, allowing the business to offer employees extra incentives by granting share options. This can encourage and motivate employees to work towards long-term goals, increasing the public profile of founders and the business and providing reassurance to customers and suppliers creating an improved climate to support future growth e.g. acquisitions – by using quoted shares in effect as currency.
Disadvantages of stock market flotation
Of course there are potential pitfalls, for example:
- Market fluctuations
A stock market listed business may become vulnerable to market fluctuations beyond the control of management – including market sentiment, economic conditions and/or unanticipated developments
These can be substantial at flotation and potentially the ongoing costs of compliance to maintain a listing as a public company
- Responsibilities to shareholders
The presence of outside investors looking for a return for their capital, this means heightened obligations on directors of the business to consider wider shareholder interests when running the company – which may differ from founder and other director objectives
Additional regulatory requirements are mandatory for listed public companies who are obligated to meet stock exchange and statutory standards of corporate governance including to make announcements about new developments
- Demands on the management team
Managers will to a greater or lesser extent be distracted from running the business during the flotation process and the increased compliance requirements will come at a practical as well as financial cost post flotation particularly to manage
- Investor relations crucial to maximise the benefits of being a public company and to attract further investor interest in shares.
If you require further information, please contact Tim Sadka at firstname.lastname@example.org or call him on 0800 276 115; he will be pleased to be of service. Alternatively, please contact us at email@example.com.
The information contained in this communication is for information purposes only and is not intended to constitute legal advice by the author and Rix & Kay Solicitors LLP. No reliance should be placed on the content and if contemplating acting in reliance on the content then, before doing so, legal advice should be sought.
Rix & Kay Solicitors LLP has offices across the South East, in Sussex and Kent.