Planning your exit: Why growing business owners should start early

As a business grows, it’s natural to focus on expansion, profitability, and operational success. However, one critical aspect often overlooked during the growth phase is planning for an eventual exit.

Whether the goal is to sell to a third party, pass the business to family, or transition to an Employee Ownership Trust (EOT), planning for exit early can make a significant difference to both the financial outcome and the ease of the process.

Why think about an exit now?

Exit planning isn’t just for those ready to retire or sell. Decisions made during earlier stages of the business lifecycle can have long-term implications for tax efficiency, business valuation, and flexibility. Leaving it too late can result in missed opportunities and unnecessary tax costs.

For example, in a number of situations, tax reliefs are only available after a qualifying period, which can range from 12 months in the case of the Substantial Shareholding Exemption (which can exempt corporate gains on qualifying share sales), to six years in the case of degrouping charges (which can reverse the tax neutrality of moving assets around groups).

Whilst it is not possible to predict the future (particularly in relation to tax policy and legislation!), having an exit plan in place and regularly reviewing that plan is essential. This means that when change is implemented, business owners can react and adjust accordingly, allowing them to build a strategy that maximises available reliefs and minimises liabilities.

This is particularly relevant in the context of recent changes to the tax landscape, which to name a few, include changes to Capital Gains Tax rates, restrictions (and subsequent partial U-turns) to Business Property Relief, changes to Business Asset Disposal Relief, the curtailment of EOTs and the expansion of Enterprise Management Incentives (EMIs).

The importance of structure

The way a business is structured can significantly influence the exit options. For example:

• Buyers (and trustees in EOTs) favour clean holding structures, ring‑fenced trading risk, and clarity over intellectual property and key contracts.
• A well-designed group structure can facilitate the sale of part of the business without triggering unnecessary tax charges, such as by utilising the Substantial Shareholdings Exemption.
• Investment and trading activities within the same company or group should be carefully considered, as the presence of substantial investment activities can limit or prevent certain tax reliefs from applying.
• Seller preparation typically lifts the value of the business and reduces execution risk and timescales.

Getting this right from the outset is generally easier and more cost-effective than trying to restructure at the point of exit, which would usually involve more complex measures such as a demerger.

Choosing your exit route

Structuring an exit is complex and will be unique to the specific circumstances of the business and its owners. The three most common approaches to an exit are as follows:

Family succession: Keeping it in the family

Passing ownership/management of the business to the next generation is intended to provide continuity, preserve the family’s legacy and ensure alignment with family wealth and governance objectives.

There are a number of mechanisms that can be used to transfer ownership, depending on whether this takes place during the owner’s lifetime or on death. Lifetime transfers may include gifting shares, creating growth shares, using family trusts, company share buybacks, or management buyouts, where select family members acquire the business using future profits.

Employee ownership: Cultural continuity

Selling the business into employee ownership can encourage engagement and retention of key employees, maintain the business’ culture and values, protect its legacy and also allow for an exit for shareholders when perhaps there are no suitable third parties.

The mechanisms can again vary, and could include an EOT, EMIs or a management buyout. EOTs are attractive because they allow for a reduced rate of Capital Gains Tax for the seller, and the employees may receive Income Tax‑free bonuses within set limits. EMIs allow for employees to enter into an agreement to buy shares in the future at a price agreed now, with certain tax advantages available.

Third‑party exit: A clean break?

Selling to a third party typically crystallises and realises the immediate value of the business, de-risking personal wealth for the owners. It may also allow the business to grow in ways that would not be possible without third party backers. However, there may be contingent consideration, or consideration in the form of shares in the acquiring business which will need careful consideration. The transaction is usually setup as a share sale, which is typically more appealing to the sellers, or a ‘trade and asset’ sale, which can be preferred by some buyers. Each will have different tax and commercial implications.

Key considerations for business owners

As the above shows, there are lots of potential options with significant complexity. The key points to consider are as follows:

• Define your goals: are you planning a trade sale, family succession, or employee ownership?
• Review your structure: is your current setup aligned with your exit objectives and the current tax landscape?
• Understand the potential tax implications: seek advice on tax rules early so that informed decisions can be made.
• Plan ahead: the best outcomes often require years of preparation, not months.

How we can help

We work with growing businesses to ensure their exit strategy is tax-efficient and aligned with their long-term goals. Whether you’re just starting to think about an exit or want to review your current plans, our team can guide you through the complexities. Get in touch to find out how we can support you.