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How to exit your agency business

For many business owners, exit planning is something that is thought about far too late in the process, which can result in business owners receiving less for their business than it’s worth.

It is crucial to start planning for your exit as early as you can and we would recommend at least two years before any eventual sale, but preferably earlier. 

To maximise the money that you will leave your business with, you need to consider two areas:

  • Method of your sale (and the tax implications of each)

  • The value of your business 

Method of exit

There are currently many options available for you as business owners to exit:

  • Sell to a third party

  • Sell to the management team as part of a Management Buyout (MBO)

  • Sell to the entire team as part of an Employee Ownership Trust (EoT)

Each option has its pros and cons, so we will run through each separately below. 

Third party sales

Selling to a third party is often what business owners have in mind when they consider exiting. Sometimes this can be the best option, especially if you are lucky enough to find a buyer that is willing to pay a premium for your business, perhaps because you are a competitor or you have clients and a team that they are willing to pay above market value for. This is often the way that you will achieve the highest sale price for your business. 

From a tax perspective, you are likely to qualify for Business Asset Disposal Relief (BADR) on the first £1m of sale proceeds. This will mean your tax rate on the first million is 10%, whilst the remainder will be at 20%. This is subject to meeting all BADR conditions and it is crucial that you obtain tax advice before entering into any sale agreement.  

Most business owners believe that selling to a third party is their best or only option when it comes to an exit, but the reality is that this is incredibly difficult to achieve. Finding a buyer can be very hard, and finding someone willing to pay a premium for your agency can be even harder. So what other options are available to you?

Management Buyouts (MBO)

A popular option for business owners is to sell the company to a trusted team of senior leadership. These employees already know the business inside and out and are going to provide a great option for continuity for the rest of your team. You can sell to them, knowing that your company is in good hands when you leave. 

This option also can provide some flexible financing options whereby the employees can seek external financing to fund the deal or use the business profits to satisfy their payments or even a mix of the two options. 

The tax treatment for you will be the same as with a third party sale and there aren’t any initial tax implications for the employees. 

We have completed a number of successful MBO’s over the past year and they are typically much simpler than a third party sale. This means a quicker completion time, lower legal fees and less need for complex due diligence. On the flip side, selling to the employees often leads to a slightly lower valuation being agreed than when selling to a third party.

Employee Ownership Trusts (EoT)

An Employee Ownership Trust involves selling your business to your entire team. The key here is that all employees must be included in equal terms, which sometimes rules this out as a viable option. 

However, if full employee ownership sounds like a good option to you then there could be some major tax benefits for you as the seller. Subject to the various conditions being met, if you sell a controlling stake of your business to a qualifying trust, then you will receive your proceeds completely tax-free. 

This option can be more complex to set up and will likely incur higher professional fees, but the long-term benefits of employee ownership and the tax benefits to you as the seller can definitely outweigh the cost and complexity of setting this up. 

The value of your business

Other than the structure of the sale and the tax you pay, the other major factor that will impact how much you walk away with is the value of your business. 

The majority of businesses that we work with will be valued using a multiple of adjusted EBITDA (Earnings before interest, tax, depreciation and amortisation). This is known as the maintainable earnings method. Often, three to four years worth of historical financial data will be analysed and adjusted for exceptional expenditure and then a multiple will be applied to the average adjusted EBITDA across the period. 

  • Using this methodology, it is clear that two things will massively impact the resulting valuation:

  • Your profit levels

  • The multiple that you use

When it comes to a multiple, we would apply a base multiple based on current sales trends in the industry. We will then look at many factors in the business to determine whether or not the multiple in this instance should be reduced or increased. These factors can include, but are not limited to:

  • Size of the business

  • Reliance on the founders

  • Strength of the team

  • Clients

  • Geographical location and reach

  • Reputation/brand strength

  • Method of billing (project versus retainers)

This list is not extensive and does not apply in every case, but can act as a guide to the areas that we believe could impact your business value. 

You should start planning for your exit at least two years before the event. As part of that, looking at your business valuation and the areas that you should work on before attempting to find a buyer is very important. 

We can help you prepare an independent business valuation, looking at all key factors that affect both your profit and multiple. We’ll also give you recommendations on the key areas to enable you to boost your multiple and become more desirable to a potential buyer.

If you’d like our help, please book a call with our Head of Business Tax, Natalie, using this link or email us at tax@thewowcompany.com.