Factors to consider when preparing for a Shareholder Exit

1. Planning

The most important factor to consider when preparing for a shareholder exit is planning ahead. This means having a clear understanding of the business and its value, as well as the goals of the shareholder(s) exiting. Having a plan in place will help to ensure a smooth and successful exit process.

To do so, you can:

Work with an experienced business broker or M&A advisor to help with the sale process
Hire a valuation expert to assess the value of your business
Create a detailed shareholder agreement that outlines the terms of the exit

2. Timing

An important decision to make is deciding whether you want to sell your shares outright or give them up gradually over time. There are pros and cons to both options, so it's important to weigh your options carefully.

You'll then need to think about the current market conditions.

If you're selling your shares, you'll want to get the best possible price. This means timing your sale carefully so that you're not selling in a down market.

3. Negotiation

The negotiation process can be complex and delicate during a shareholder exit. It is important that all parties involved are able to come to an agreement that works for everyone.

The negotiation process will go more smoothly if:

All parties have a clear understanding of their goals and objectives
There is transparency and communication between all parties
Both sides are willing to compromise to find a solution that is in the best interest of everyone involved

Some firms will take on the services of a negotiator.

4. Valuation

Another important factor to consider is the value of your shares. As we mentioned with timing, if you're planning on selling, you'll want to make sure that you're getting a fair price for them. There are a few ways to determine the value of your shares, such as using a professional appraisal or hiring a financial advisor.

In general, for shareholder exits, here are a few best practices when it comes to valuations:

Use a professional appraiser who has experience with similar businesses
Get multiple appraisals to ensure accuracy
Understand the difference between fair market value and intrinsic value

5. Tax Implications

There are tax implications to consider when preparing for a shareholder exit.

Depending on how you structure the sale, you may be liable for capital gains taxes, so make sure you keep in mind:

The tax implications will vary depending on your specific situation
You may be able to minimise or even avoid capital gains taxes by structuring the sale in a certain way
It's important to speak with a tax professional to get specific advice for your situation

6. Legal Considerations and Documentation

There are also a few legal considerations to keep in mind. For example, if you're selling your shares, you'll need to have a legally binding contract in place. This contract should spell out the terms of the sale, including the price and any conditions that must be met.

Other legal considerations may include:

Employee agreements: If you have employees, you'll need to make sure that their agreements are up to date and include provisions for a shareholder exit.
Non-compete clauses: You may also want to include non-compete clauses in your shareholder agreement to protect your business interests.
Intellectual property: Make sure that your intellectual property is properly protected. This includes any patents, trademarks, or copyrights that you may have.

In order for a shareholder exit to be successful, it is important to have accurate and up-to-date documentation in place. This includes financial statements, corporate documents, and agreements between shareholders.

Having everything in order will help to ensure a smooth transition process, so make sure you keep all this necessary information in order on up-to-date financial statements.

Store all corporate documents in a safe place and have shareholder agreements easily accessible.

7. Emotional Impact

This is usually ignored but it's important to consider the emotional impact of a shareholder exit.

If you've been with the company for a long time, it can be difficult to let go. You may also have feelings of attachment to the business itself. It's important to be prepared for these emotions and to have a support system in place.

To do so, you can: speak with a therapist or counsellor who can help you deal with your emotions. You can also talk with other business owners who have gone through a shareholder exit or join a support group for business owners.

8. Communication

Clear and effective communication is key during a shareholder exit.

All stakeholders involved should be kept up to date on the progress of the exit and any changes that occur. This will help to avoid any surprises or misunderstandings.

Make sure you have regular meetings with all parties involved and follow a clear and concise communication plan that outs a point person in place to be responsible for communication.

If you would like to discuss funding a shareholder exit in more detail or discuss our wider funding capabilities, do get in touch.

About SME Capital

SME Capital was founded to support the growing number of SMEs who face difficulty or frustration in accessing capital through traditional methods. We understand the importance of real and trusted relationships in the SME lending market and have dedicated Regional Directors based across the UK. By combining traditional lending expertise with the latest in data analytics, we are supporting established UK SMEs with their long-term objectives and business ambitions.