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What exit strategies should I plan for?

An investor or an entrepreneur can realise his investment in an enterprise through an exit.  Exit and exit strategies are therefore a very important aspect to any investor and usually a clear and defined exit strategy is a prerequisite to any investment and financing.  The capital returns from the investment is also very lucrative from a tax perspective for an investor and also for an entrepreneur.

Individual investors can receive significant relief under SEIS and EIS.  Capital returns are also attractive to the investors of private equity funds as non-UK residents and pension funds are not liable to UK capital gains. 

So far as entrepreneurs are concerned, they too can benefit from an exit, especially if they are able to claim entrepreneurs’ relief on the gains on the disposal of their interest in the enterprise. 

If entrepreneurs’ relief is available, the rate of tax reduces from 28% to 10% on the first £10 million of gains.  Broadly speaking, to be eligible for claiming entrepreneurs’ relief on the sale of the interest in a trading company (or the holding company of a trading group), the entrepreneur must have held the shares (or interest in the shares) for at least a period of one year ending on the date of disposal of the shares (or interest in the shares) at during that one period  he must have held at least 5% of the voting rights in the company and must have been an officer or employee of the enterprise.

An exit can occur in many different forms. Some of the common exit strategies for a small business are as follows:

Sale

This is the most popular option for small businesses.  After a few years since the start of the business and at a time when the business products are developed or in an advanced stage of development, the enterprise is put up for sale to a third party purchaser.

The most important part of the sale process is negotiating the price for the sale so that the sellers can get the maximum returns for their investments.

IPO (Initial Public Offering)

An IPO of the shares on a recognised stock exchange (or the AIM Market, if appropriate) can be a viable exit strategy. Taking the company public can be extremely profitable.

However, depending on how the IPO is structured, the entrepreneurs and investors may or may not be able to withdraw the entire capital especially if the new shareholders wish to see that an amount of the new money raised by the IPO should be used to expand the business.

Management buy- out (MBO) and buy-in (MBI)

An MBO is a transaction where the existing management team buys the business out from the retiring existing owners, usually by obtaining debt and/or equity financing through private equity funds and banks. A similar transaction but involving an external management team is called an MBI.

Private equity investors and bankers are open to MBOs because the managers are intimately familiar with the operations, and they can create value by continuing on in the business.

Liquidation

This is another exit option, although not the most preferable or lucrative option. It is effectively closing the business. To make any money with such an exit strategy, the business has to have valuable assets to sell, such as land or expensive equipment. For small businesses, especially those that are dependent on the performance of a single individual, liquidation is sometimes the only option, as there's really nothing else to sell.


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