Exit and Succession Strategies should be planned ahead

by Kidd Rapinet on February 29, 2008

The fundamental point is to think and plan ahead. Hand in hand with this is the need for proprietors to keep their advisers well abreast of their objectives and intentions and give them the opportunity to advise in a timely way.

The starting point is to consider the likely method of leaving the business, and timing. Thus the objectives of the proprietors require consideration, as well as the likely fortunes of the business over the economic cycle.

The involvement of senior employees and the need to make available an equity stake to those upon whom reliance will need to be placed, require careful consideration.

For those who want to Exit – consider well in advance if a flotation is likely, or whether a trade sale will be the Exit Route. If the latter, then take a view on whether it may be expected to be an asset sale or a company sale.

Proprietors need to be reminded that they are not indispensable – if they are, then the objective becomes self-defeating. An orderly run down of the proprietor’s involvement in advance of retirement needs to be considered, without prejudicing tax reliefs.

Consider tax issues in the context of making the deal rather than breaking it. The need to get Revenue clearances and the effect of Tax Warranties and Indemnities requires consideration, from the seller’s point of view well in advance. Specialist tax planning advice should be taken – particularly in the light of changes to Capital Gains Tax and the available reliefs on business sales.

The ideal – of avoiding tax altogether – cannot always be achieved. Failing that, attempt to reduce the applicable rate – alternatively a deferral will at least be beneficial from a cashflow point of view.

The Memorandum & Articles need to be in order. In the case of an asset sale one does not wait to find at the last minute, that the company’s constitution does not give the Board power to enter into a particular transaction and shareholder approval is therefore required.

If Shareholders’ agreements give other shareholders protection, then will these permit an orderly exit for the majority, and the achievement of their objective without difficulty? If not, consider changes.

Do venture capitalists hold different classes of shares with special rights? If so, make sure their agreement to the intended strategy is obtained.

If a flotation is likely then take timely action to reincorporate within the plc framework.

Listing and prospectus requirements, compliance issues and corporate governance also require consideration, and specialist corporate finance advice should be taken.

Consider transferring shares to Settlement Trustees well in advance of the likely disposal, to allow growth to accrue in a tax-efficient environment.

Where Succession is in prospect (and, of course, remember that particularly in a Family context this should be considered as an alternative to a complete Exit – indeed traditionally a Succession strategy was the route of choice) consider passing the business down to the next generation over a period, making use of available tax exemptions and reliefs.

Ahead of negotiations, confidentiality agreements may need to be signed up, and lock out or option agreements and conditional contracts should be considered. The need to negotiate “subject to contract” should be borne in mind.

The opportunities to create a successful Exit and Succession strategy and achieve an advantageous sale – or an orderly hand-over to the next generation, in a tax-efficient environment – are self-evident and well worth the time and effort involved for those prepared to plan ahead.