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Three possible business exit strategies

Executives/owners of single-member private limited liability companies have a number of ways to leave a business. The most common ones are handing over the reins to a new executive, selling the company to investors and winding up the company coupled with the sale of assets.

Finding a new CEO

Finding a new managing director may be a good option if the company owner doesn’t want to quit the company completely and still wants to have a say in shaping the key decisions. In such a case, the owner can take up a seat on the supervisory board instead. Often single-shareholder executives are succeeded by family members (sons, daughters). In such a case, the future leaders need to be groomed to ensure they understand the line of business and the director’s functions. In addition, descendants should be sounded out as to whether they want to continue in the company’s line of business and whether they have the requisite enterprisingness.

If the directorship doesn’t pass to a family member, the key question is finding the new CEO and motivating that individual. It’s important to make the new CEO feel as if he or she has a stake in the company, to avoid the risk of takeover. There are a number of ways to hedge risks, such as linking the company’s results with a stock option. It is also wise to stipulate a no-compete clause and the obligation to keep business secrets in the contract with the management board members.

Preparations for sale

The biggest challenge for companies with single-shareholder executives is the owner’s relations with customers – how to guarantee that the customers will be retained after the change of ownership? In preparing a company for sale, the company’s structure and ownership relations should be reviewed.

If the company owner plans to stay in business, it would be a good idea to use a holding company – then the proceeds of the sale can be reinvested without income tax obligations incurred. To ascertain the shortcomings and potential risks, due diligence should be carried out. Then, problems should be resolved and steps taken to mitigate risks on the basis of the results.

If the company has real estate that is not directly used for business activity, it would be a good idea to separate it from the company. The company’s value should also be assessed and the most important factors that determine the value should be identified. It is a good idea to critically review loss-making units and close them if necessary. The valuation result of the company can be used as a starting point in negotiations on the sale price.

Sale of a holding and finding investors

With regard to finding possible investors, it’s important to think about who might benefit from acquiring your company. Whom might it generate value added for? The potential range of investors depends on the size of the share being sold. The potential investors include strategic investors, financial investors, competitors on the home market, as well as companies offering the same products or services outside the home market. If the plan is not to unload 100% of the holding, the company’s future prospects should also be considered, in addition to the asking price when selecting investors.

Amanagement buyout could be the most promising plan once a new CEO has been found. The sale of the company by portions or on deferred terms could be agreed immediately upon finding a new CEO for the company.

Strategic investors generally do not operate in the same field of activity, but acquisition of business activity would give them new opportunities, such as information on technology or a product, control over the supply chain or sales network. A strategic investor may bring their own know-how into the company, helping the company become more competitive. In general, strategic investors are interested in a minority holding with a later possibility of acquiring a controlling stake.

Financial investors see the company’s value in its ability to generate cash flows. Financial investors should also ensure the optimal capital structure for the company and they are not interested in day-to-day management of the company.

In the case of competitors on the home market, active contracts, locations of points of sale and a unique technology can all incite interest in acquiring a firm. Of course, it is risky to give direct competitors information on one’s business activity.

Companies that do not operate on the same market but offer similar products or services may be interested in entering new markets. Acquiring an operating company along with its existing customer base is certainly less costly than developing one’s own sales network and customer base from scratch. In the case of such companies, keep in mind that generally they are interested in acquiring the entire firm.

Before sharing sensitive information with a potential buyer, enter into a confidentiality agreement and a preliminary contract of sale that spells out what happens if the transaction does not go ahead.

Dissolving a company and selling off assets

Dissolving a company and sale of its assets is a reasonable course if the company’s activity depends greatly on the executive/owner. It is also a wise move if potential investors cannot be found or if the sale of the company’ assets piecemeal is more profitable than selling the entire holding. Companies operating in the same field are potentially interested in the case of sale of assets. A company’s assets consist of PPE as well as intangible assets, e.g., customer agreements. Often customer agreements make up the most important part of a company’s value.

Payment of sale price

Buyers are generally interested in the sale price that depends partially on the company’s economic performance in subsequent periods. In such a case, it is important for the seller to have significant capacity to influence the company’s results. If the seller ends up with a minority holding or the company is sold as a whole, it may prove difficult to achieve the goals set. At the same time, if the company has good results, there’s the possibility of getting a higher sale price.

An important step is to conclude a share purchase agreement and shareholders agreement, as these agreements can be used to specify the rights and obligations of both parties in an unequivocal manner. Determining a sale price in a manner that doesn’t depend directly on the performance of the company may be useful for the seller if the economy is unstable and there is no desire to play a further part in the company’s activities.