This week, we will look at planning your business exit. We met Jimmy Fontaine yesterday. He has an IT sales and service company called Fontaines PC. Jimmy and his wife Jane have 3 kids, and none of them are showing any interest in the business. Jimmy is 57 now and would like to exit in the next 5 years. Let’s look at
- Company assets
- Key employees
- Options
- Keep employees
- Next Steps
Company Assets
The company’s assets are cash and property. There is €600k in the bank, and there are two properties. One is the unit that the business operates from, and the other is a rental property in Leitrim. Another asset, not on the balance sheet, is goodwill. That is the reputation of the business and the contracts that the company has with customers. There is no value on this for now.
Total assets are worth €1,000,000. The unit where the company works from is valued at €225,000, and the rental property is worth €175,000.
Key Employees
Fred and Wilma are key employees. Fred is an IT nerd and knows the ins and outs of every laptop under the sun. He is super at selling and customer retention. Wilma is the boss of the office. Everything runs smoothly when Wilma is about. She looks after all the finances and solves most of the problems to make Jimmy’s life easier.
Both work hard and smart and, in Jimmy’s eyes, are vital for the continued success of the business. But there’s a fly in the ointment. Fred got a juicy offer from a competitor with an extra week’s holiday and €40,000 more in salary. Jimmy knows that’s a great offer and hard to turn down. He’s anxious to know if there’s any way to keep him without throwing money at the problem now.
While Wilma isn’t looking to leave, Jimmy knows he’d be lost without her. Her current salary is €45,000, and Fred’s is €60,000.
Options
Jimmy has some options when it comes to exiting the business. I will ignore transferring the business to a child as that won’t happen. He can wind up the business and close down the company. Appoint a liquidator to distribute the cash value remaining in the company to him. That’s not an ideal option as the two main drawbacks are
- The business closes, the customers go elsewhere, and the staff lose their jobs and
- Jimmy doesn’t sell the business, so he gets no value for it other than the value of the company at the time.
Sell the business
He can sell the business to a third party. In this case, that would sort out the two issues mentioned above. A buyer would look after the existing customers and hopefully keep the current workforce, too. Plus, Jimmy would maximise the value of the business. Let’s assume the business will be worth €1,000,000 at the time. Even if he paid CGT at 33% on the extra million, he is better off by €670,000.
Management Buy Out
When planning your business exit, another option is a Management Buy Out or MBO. This is where a key employee or employees would buy the business from Jimmy. Potentially, this is the best solution as it would cause the least upheaval. Rather than selling to a competitor, Jimmy could sell it to a couple of employees who will drive it on. This can be a more gradual sale. Jimmy doesn’t get paid all the money upfront but gets an initial lump sum and the balance over a two or three-year period. He gets the balance from future profits once certain financial targets are achieved.
The key win for the buyers is that they are not funding 100% of the purchase price in one go. They would have to get external funding, but there could be an option to refinance that funding post-buyout. Structuring the MBO over three to four years puts the employees in a position to buy.
What helps the process is strong existing cash balances in the company. These can be useful when it comes to refinancing. Plus, any balance owed to Jimmy can come from future profits. As a result, finance wouldn’t be needed for that element of the sale. Another advantage of the MBO route is that Jimmy would be sticking around for a few years post-sale.
That post-sale role for Jimmy doesn’t have to be a full-time role. But his skin in the game is helping the buyers to achieve the financial targets set. After all, the balance of his sales proceeds depends on that. He’d get paid for his time, but he wouldn’t only any shares then as all shares have gone to the new owners at this stage. Plus, the buyers will want to lean on his experience and knowledge to help them run a successful business.
Keep Employees
Jimmy wants to keep his key employees for the next 5 years and onwards. They are set to launch an exciting bells and whistles laptop called the “Starburster.” Fred knows the ins and outs of this better than his own children. It has been very well received by existing customers, and some orders have come in already. The business pipeline is strong for the rest of 2025. And Jimmy would be optimistic for the future despite what the orange sun king is doing in the States.
We mentioned the KEEP scheme to Jimmy, and he’s interested. KEEP stands for Key Employee Engagement Programme. Its purpose is to help smaller businesses hold onto talented employees in a competitive employment market. Fred and Wilma are key to Fontaines PC, and Jimmy wants to explore further but has questions. If he gives up 20% of his business to Fred and Wilma, is he not giving 20% of everything in the company now? The answer to that is yes. So how does he avoid that scenario? I will tell you later but first how to keep the valuable two.
Advantages of KEEP
The main advantage of KEEP for Fred and Wilma is that they don’t incur a tax charge when they get the shares. Without KEEP, if they get share options in a company, they incur an Income Tax, USC, and PRSI charge on the value of the shares. That’s a cash cost to them, but they don’t have the cash to pay it unless they sell the shares. But with KEEP, there is no initial tax charge. That only happens at some future date when they sell the shares. When they sell, they’ll be in funds to pay the tax. And it’s CGT at 33% as opposed to Income Tax of up to 52%. There could also be some CGT reliefs like Entrepreneurs Relief [ER]
The company must be a trading company, which it is. The employees have to meet certain minimum working hours, which they do. The share options must be at market value. We will need to get Ger involved to do a company valuation. Revenue will expect a valuation, and both employees will want to know the starting value of what they are getting. There’s a cut-off date of the 31st of December 2025 to avail of the favourable tax treatment. Plus, the shares must be exercised within 10 years of getting the option.
Let’s say Ger values the company at €1,200,000. On the face of it, the starting value of Fred and Wilma’s share options is €120,000 each. But it isn’t as significant discounts apply to minority shareholdings. Using a discount of 90%, each 10% shareholding is valued at €12,000. In 6 years’ time, Jimmy receives an offer for the company of €2,000,000. Both exercise their options and pay €12,000 for their shares. Both get €200,000 when selling them.
| Sales Proceeds | €200,000 |
| Less Cost | €12,000 |
| Gain | €188,000 |
| CGT 33% | €62,040 |
If they could get ER, the CGT rate would reduce to 10%, and the CGT would be €18,800.
Next Steps
Jimmy has built up the company and has retained wealth in it. If he grants options to Fred and Wilma now and they exercise them, then they will get some of that retained wealth. To start from a level playing field, it would make sense for Jimmy to hive out the property assets and some of the cash. What’s left then is the business and enough cash, so there’s plenty of working capital.
One option to do this is to set up a group structure. This is where a holding company that Jimmy owns sits on top of the existing trading company. When transferring properties from one company to another, you are transferring ownership. That is a disposal, so the taxes are CGT, Stamp Duty, and VAT too. A holding company structure can have tax advantages when moving assets and cash. I will delve into that in more detail in a future blog. For now, the key next steps are
- Jimmy to discuss his plan with Fred and Wilma to see if they are interested
- Get a proper valuation done
- Explore the hive-out option so the properties and some cash go into a separate company that Jimmy owns
- Look at the tax implications for Jimmy
- Look at the tax implications for Fred and Wilma
- If he proceeds with the KEEP scheme, get a shareholder’s agreement in place.
Are you planning your business exit and need some help? If so, start here
