How to exit a family business

For family business owners, change is inevitable throughout the lifecycle of your company. Since day one, you’ve worked hard to build a business from the ground up – transforming a vision into reality, navigating challenges, and creating an asset that reflects your values and dedication. Now, you may find yourself contemplating the next step – whether that’s retirement or a new project. But what are your options for exiting the business and moving on?

In this article, we’ll explore the range of exit pathways and strategies for UK business owners. Whether you’re considering passing the torch to the next generation, selling to external investors, or exploring alternative exit routes, we aim to provide you with a comprehensive understanding of your options – ensuring that you preserve your legacy and fully unlock the value you’ve built over the years.

What to consider before exiting a family business

The best approach to exiting a family business depends on your situation. Start by thinking about your desired outcome. What do you want to do with the business?

Many owners pass it on to a family member – a standard and viable strategy. Others sell it to retrieve the capital and any brand equity for retirement. Your reasons will be personal.

The structure of the business also matters. Handing over a sole proprietorship requires a different process from passing on a limited liability company.

Even family dynamics can play a role. Giving a business to children who don’t get on with each other could jeopardise its long-term success (a cautionary tale from HBO’s award-winning series, Succession).

The financial value of the business is also an essential consideration. You should weigh up selling now against growing the business to make it more valuable in the future.

How to exit a family business – Four options

There are four main options for exiting a family business are selling up, a management buyout, winding up, or passing on to a successor. Let’s take a deeper look at each option.

Business sale

Selling your family business can be an excellent option if you:

• Want to free up the maximum amount of capital soon
• Predict a downturn in the industry and can’t adapt to it profitably
• Need a clean break or to maximise your financial freedom
• Don’t have any family members willing to take over

The most common form of business sale is to an institutional investment group or another company, often a competitor – particularly if they have a proven track record, large client base, strong brand, or other valuable assets (such as intellectual property).

Family business owners may also sell to individual investors or acquisition entrepreneurs: people with funds who want to purchase ready-made businesses and improve their profitability.

Another option is selling to your workers via an employee ownership trust (EOT). An EOT takes around six months to set up and helps you pass a company over to the employees over time while you are paid out from the business’ profits. It’s a great means of preventing third-party buyers from swooping in and making changes you don’t want, and it rewards the people who helped make the company a success.

Dive deeper: Selling a business in the UK? Here’s everything you need to know.

Management Buyout

The second choice is a management buyout (MBO). In an MBO, you sell the business to the management team (not the employees), letting you take your share of the capital when you leave.

For example, suppose there are three managers in your company. You own 60% of the shares, and the other two own 20% each. In a management buyout, those remaining managers can buy your shares. If they purchase in equal amounts, they will end up owning 50% of the company each.

Management buyouts can be tricky because stakeholders can find it hard to determine the company’s value. Both you and the buyers will want to know a fair and justifiable price (our business valuation experts can help).

The management team will also often need to secure financing. Banks could offer them loans to cover the cost, or a private equity firm could stump up funds in exchange for equity.

If you care about who controls your company after you leave, be careful with the latter option. These companies may attempt to exert managerial control and change the company’s direction.

During a management buyout, you may need to arrange various documents, which can add time and complexity to the process. These include:

• A share purchase agreement that details the purchase price, terms of sale, and payment structure.
• Various management contracts to define new roles and responsibilities for the incoming team.
• Employment contracts that detail worker rights and actions during the handover period.
• Various non-compete agreements to protect the new owners against you setting up a rival business after exiting.

Winding down the business

The third and least desirable option is to wind down the company. This family business exit strategy isn’t always pleasant but might be necessary if the business is no longer viable and you can’t find buyers.

The priority here is to pay off creditors and liquidate the company to extract as much remaining capital as possible. It involves:

• Assessing the residual value of the firm (how much it’s worth)
• Telling employees, creditors, customers, and suppliers you are ceasing trading
• Settling debts with banks and investors
• Submitting final tax returns and accounts
• Closing company accounts

You will also need to consider employee rights and redundancy payments. These will reduce the capital you can extract from the business.

Passing the business to a family member

Finally, you can pass the business on to a family member. You can do this for legacy purposes or estate planning – it’s entirely up to you.

The key here is to put a proper succession plan in place. Conflict can emerge if some family members feel they are getting a raw deal from the sale. You can also run into problems if you hand over equity to beneficiaries who don’t have the skills to operate the company successfully.

If you want to exit using this method, do the following:

• Seek professional guidance from solicitors and accountants who understand how ownership transfers work.
• Start the process several years before you decide to exit and warn family successors.
• Look for successors who can operate the company and compensate others who can’t in other ways.

Which is the right option for you?

In truth, only you will know which business exit strategy is the best option.

Sometimes the choice is obvious. For most business owners though, it requires serious thought and succession planning.

Having an understanding of the different options is a good starting point, but as a next step, you should consider speaking with professional advisers, such as your accountant, solicitor, or business mentor.

You could even speak to people in your network who have sold or exited a business previously for insight into their experiences.

If you would like our advice, then you can get in touch with our team to organise a free consultation. As a leading firm of chartered accountants and business advisers, we can help you every step of the way.