When you start a business the excitement and optimism often overshadow the need to plan for a potential exit. When a company has multiple shareholders, agreeing on an exit strategy becomes more complex because of individual ambitions and shareholders’ expectations from the business. However, a well-thought-out plan is essential for long-term success, a smooth transition of ownership should one or more shareholders wish to sell and to maximise the value of the business for all involved parties.
In previous articles we’ve explained why an exit plan is essential from the beginning and throughout your business journey. The reasons include:
- It provides clarity and alignment among shareholders regarding the terms and conditions of selling or transferring shares. It ensures that everyone is on the same page and minimises the potential for disputes or conflicts in the future.
- It enables smooth transitions by outlining the procedures and timelines for shareholders’ departures which helps in making changes as straightforward as possible. Without a plan, abrupt exits can disrupt the business operations and impact its overall stability.
- By agreeing a fair valuation method, disagreements can be avoided (or at least reduced) over the value of shares during an exit. Determining the value of a company and the price at which shares will be sold can be a complex process so prior agreement between shareholders on a methodology is a real advantage.
- Different jurisdictions may have specific regulations and tax implications governing shareholder exits. Having an exit plan that complies with the appropriate regulations helps towards a legal and orderly process when a shareholder decides to leave.
When considering a multi-shareholder exit plan it pays to start early – ideally your objectives should be discussed and agreed at the outset of the business venture. This way, all shareholders are aware of the exit strategy from the beginning and fundamental disagreements about building for a quick sale or holding for long term value generation can generally be avoided.
Here are some further recommendations:
The foundation of any successful exit plan with multiple shareholders is open and transparent communication. Shareholders should express their goals, concerns and expectations honestly and record these views. As circumstances, expectations and personal requirements can change, a periodic review and, if necessary, a refresh will help the eventual exit process.
It’s important to engage financial advisers, lawyers, and business valuation experts to help. Their expertise can guide shareholders toward informed decisions, including discussions with tax professionals to understand the tax implications of different exit strategies.
Consider various exit options which might come into play if one shareholder wishes to sell such as a trade sale, merging with another company, attracting private equity, or selling to either the management team or setting up an employee ownership trust. Each option has its advantages and disadvantages and exploring them can lead to better informed decisions.
In situations where some shareholders wish to stay actively involved in the business the ‘exit’ may take the form of one or more shareholders buying out the others. Shareholder agreements or buy-sell agreements should provide for this eventuality. They outline the conditions under which a shareholder can sell their shares and provide a mechanism for determining the sale price. They can include provisions for situations like retirement, death, disability, or disputes among shareholders but it’s difficult to cover all potential situations. Also consider how the transaction will be financed. Will it be a cash deal or include phased payments – perhaps based on future business performance?
Although you may not wish to contemplate disagreements at the outset or when drawing up your exit strategy, including provisions for resolving disputes that may arise during an exit process, such as mediation or arbitration clauses, can help prevent conflicts from escalating. Again, a periodic review and refresh of intentions and expectations is advisable to help anticipate potential issues.
Agreeing on an exit plan when there are multiple shareholders is essential for ensuring a harmonious and well-managed exit process. It provides clarity, aligns expectations and helps avoid potential conflicts that can arise during transitions. A carefully crafted plan not only protects the interests of shareholders but also safeguards the long-term stability and success of the business. Therefore, it’s a vital component of any business strategy, regardless of its size or industry.
By following the recommendations outlined above, shareholders can work together to create a comprehensive exit plan that not only safeguards their interests but also paves the way for a successful transition, ensuring the legacy of the business lives on.
If you have a multi-shareholder business and want to plan for a sale, the departure of shareholders or any other variant of business exit talk to us.