It takes guts to start a business. It also takes a strategic mindset to succeed. Back in September 2022, our blog, How do I create a Succession Plan? stressed the need to think well in advance of the point when you actually wanted to exit your business and offered a 3 point plan to get you started.
In the current economic climate, a gradual buyout, also known as a phased or earn-out buyout, offers several advantages for business owners looking to sell their businesses. This approach allows for a more flexible, less risky transition of ownership.
Certainly, many businesses we speak with are worried about what the future may bring and this approach may lessen that worry.
What should be my exit strategy?
It's a question many business owners are posing. Carefully thought out succession plans and exit strategies may now need remapping. Some business owners are faced with the prospect of having to consider selling their business before they’re ready and, possibly, for less than they're worth.
Rob Young is the founding Managing Director of Platform 1 a company based in New Zealand that works with business owners to help them get the best possible return when selling their business. If you're unsure of the details of business owner transition, he details the 5 options available:
The 5 ways to sell your business
Gradual buy out
Close the business down and sell the assets
Sell to a family member
Sell to an employee
Just a straight sale to an outside party
This blog is going to focus on the first option, a gradual buy out and list the advantages.
What is a gradual buy out approach?
This is a common strategy for business owners and the transition can be much smoother for a number of reasons. Rather than exit on day 1 and selling 100% of the company, portions of the owner's stake is acquired by the buyer over a predefined period. That may be a single buyer, such as a trusted manager, employee, or investor, or through a group of buyers.
Exiting a business that you've worked so hard for over the years is not just about the financial implications. For many it can be an emotional period too. A gradual buy out can be far less rocky and we list why.
Smooth transition of leadership
If you're still active in the business, over an agreed period, you can gradually step away from your position. It prevents there being an abrupt change in leadership and you can take on the role of mentor - helping the transition of key roles to the new owners or management team. This method ensures continuity in management and operations and makes it less risky for both employees and customers.
Mitigate the financial risks
A gradual buy out is less risky for both the seller and the buyer. As the business owner, you don't have to find a buyer with the necessary capital to buy you out on day 1. Right now and in the current economic climate, it's not going to be easy to find that sort of profile.
A gradual buy out means that payments are structured over time relieving the financial burden on the buyer. As the seller, you benefit from ongoing revenue from the partial sale while still being involved in the business’s success.
Maintain stability
A clear concern which must be factored in during a business transition is the potential impact on company stability. A gradual buy out will mitigate this risk and would allow you to stay involved, maintain a degree of input and share your expertise. Why risk losing industry-specific intel or damage long standing client relationships with an immediate transfer when it can be handled over a period of time?
Keep the flexibility
No one business is the same and a gradual buy out can be completely customised to suit both seller and buyer. Terms such as timeline, the percentage sold at each phase, and the responsibilities of the outgoing owner can be drawn up and agreed. Think of a business owner who wants to still be a part of the business but to a much lesser degree - as a minority shareholder - still connected but with reduced responsibility. These terms can be drawn up as part of the buy out agreement.
Don't forget the tax implications
A gradual buy out can sometimes provide more favourable terms in terms of tax than an immediate sale. You don't want to be hit by a significant capital gains tax bill and spreading the sale out over time can potentially help to manage the tax burden more effectively.
Keep your team motivated and happy
For employees experiencing a buy out it can be an uncertain time. If they're concerned about the future of the business, it can impact morale and retention. A gradual buy out may help to alleviate those fears and people will draw comfort seeing that the original owner is still involved and that changes are being made carefully and thoughtfully.
When a buy out is internal, such as a management buy out (MBO), there is the added security for employees who know that the business is being handed to individuals with a deep understanding of the business.
Finally! The work/life balance you've also wanted
For many business owners, their identity is closely tied to their company. Stepping away can be daunting prospect. A gradual buy out allows you to work towards retirement or pursue other activities gradually; it's an adjustment period which will ease you into your new life. Also think of it as a time to enjoy the best bits without the day-to-day stress of running the company.
Don't delay planning the plan!
Even if you're not yet ready to sell, it’s a good idea to think about it now so you can maximise the value of the business and achieve a better outcome. It's also worth remembering that retirement doesn’t need to be doing nothing. If your business can run as an asset without your involvement, you don’t have to sell it completely.
Not selling down 100% of a business is a viable option.
Want to know more?
For many businesses, a gradual buy out is a win-win strategy - one that allows the outgoing owner to step away with peace of mind while setting up the incoming owner for future success. If you’d like to start your Success Planning journey, contact us.
You can follow us on Twitter, our Rowdens Facebook page and request to join our Rowdens Facebook Group. We're on LinkedIn too!