External factors key in exit strategies

Comment: Mike Kane reviews the options for owners looking to move on

Family firms can find it difficult when the time comes for passing over control of the business
Family firms can find it difficult when the time comes for passing over control of the business

The profile of family owned businesses in Scotland, at present, is such that a number of owners are at the point of having to make a decision about the future ownership of the business.

Having spent so long building it up, it is vexing having to make such a decision in what can be a relatively compressed timeframe.

In coming to this decision, a number of factors are at play across tax issues, the willingness and suitability of a candidate among the family to take the stewardship of the business forward or whether there is a non-family management team to do so.

There are also funding issues and consideration about whether a better strategic outcome for the business would be to combine it with another one in order to tap into overseas markets, for example.

On the tax front, there have been some recent developments in terms of which it has become more complex to hand the business over to the next generation while taking some value off the table for the current owners.

A relatively recent change in HMRC policy has resulted in an increased requirement for detailed tax advice, and there may be a longer lead time in obtaining the necessary tax clearances to implement a family succession strategy.

Assuming that there is not a family member available to succeed to the ownership, a common option is a Vimbo – a vendor-initiated management buy-out.

Obviously, this is a form of management buy-out (MBO) but the vendor-initiated aspect of it suggests that there may be softer terms around the change in ownership.

A traditional MBO would normally entail the management team raising at least some external finance and perhaps putting up some personal security in order to achieve this.

A Vimbo, on the other hand, usually would entail a smaller up-front sum for the exiting shareholder (and in this regard detailed tax advice and clearances are required).

Additionally, the softer terms might revolve around a large deferred consideration element, the absence of security (certainly personal security from the management team) and a low rate of interest.

Employee buy-outs are another option and while the take up of these has been more limited perhaps than expected, there are some good examples around and equally there are some good resources available to assist in a buyout process.

The legal process itself is likely to be more complex as the number of parties involved necessarily takes more time and effort to bring along on what is already a complex journey.

In relation to a sale to a third party, the obvious avenues are a trade purchaser or a financial purchaser.

For trade purchasers, the strategic combination of two businesses might just be the difference between a good price and a top dollar price for the business.

Private equity houses like businesses with strong cash flows and are presently paying healthy prices.

The market is also seeing a number of Far Eastern purchasers cherry picking trophy assets and given the scale of their own exits back home, the sums involved in the UK are relatively modest.

In some industries, tech in particular, the rule books around multiples of profit are being

re-written and buyers (particularly United States-based tech purchasers) are used to paying a multiple of revenues rather than profit.

Mike Kane is a partner at Turcan Connell

This article appears in the SPRING 2017 edition of Vision Scotland. An online version can be read here. Further information about Vision Scotland here.