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The Ultimate Guide to a Business Exit Strategy

Take a look at our ultimate guide to a business exit strategy and proactively plan for a successful departure.

As a business owner it is inevitable that you’ll want to exit for one reason or another. Your role will come to its conclusion in some shape or form so, just as you’d write a business plan to set out your strategy for the business, it’s in your best interests to plan for your exit in advance too.

What is an exit strategy in business?

No matter what type of business you have, at some stage you might want to get your investment out, retire or move on to a new challenge. As an entrepreneur you’ll have spent years working on your business, poring over plans, strategies etc, and cementing your blood sweat and tears into the very fabric of it. 

You’ve built something that you can be proud of and it can be a difficult decision to step away but when that time comes, whatever your reasons, preparation is key to a successful and satisfying outcome.

Selling a business can take anything from three months to three years and is all down to how ready your business is to sell. Ideally the decision to sell should be taken at least two years before you’d ideally like it to happen. In order to ensure a smooth exit you should consider planning how and when would give the best result for you. This is your exit strategy. 

Ultimately you’ll want to know how much money you can get out of the business, and of that, how much you’ll actually receive. Establishing these business and personal goals early on can give you the best chance of planning for it and ensuring that when you want to bow out, the business is ready for it.

Why is an exit strategy important?

Effective forward planning can make a big difference to your financial outcome. If, for example, you have built up the business from scratch and want it to carry on successfully after you leave you must investigate how to maximise your exit package whilst leaving the company in a strong position going forward. Arriving at your planned date to leave the company, without having a robust plan, is a disaster in the making.

If you’ve decided that you would like to sell your business, it’s important that you have everything organised before you look to get a business valuation. Understanding the persona of your likely buyer might be and what you could do to make it more appealing to them is a great first step to making your company as attractive as possible.

What level of involvement would you want going forward  – a clean break or a gentle retreat?

You need to understand what your motives to sell are and ‘what you want that to look like’? Some key points to consider are listed below:

What is your ideal financial outcome?

Are you looking to inject some cash into your pension, or do you want to achieve a certain lifestyle? There are various outcomes that could still see you receive an income from your business whilst handing over the reins.

Do you want to remain part of the business? What level of involvement do you want?

Owning a business can be demanding, and it can take its toll. Maybe you already know you want to cap your time running the show and can see yourself moving on down the line. Or you may want to be part of your legacy going forward but in a much smaller or advisory role. Your exit strategy can take into account how you see that relationship working.

What are the different types of exit strategies?

Liquidation

You want to shut up shop? You’ve just had enough and are looking for a quick exit? Then liquidation is for you. You don’t necessarily plan in advance for this but it is a way to close the business and just walk away. However, the money released from selling the assets of your business will first have to be used to pay creditors and shareholders before you get your payoff.  Alternatively, you can gradually wind down the company over time by taking out profits rather than reinvesting.

More often than not this yields the lowest return for you. It may seem like a straightforward process to simply release the value of tangible assets such as stock, property or equipment for example, but you will be walking away from intangible assets such as brand reputation and recognition, intellectual property and goodwill, which can be a huge determining factor of the value of your business.

Liquidation over time

It’s not one for public companies, but profitable private business owners can use this strategy to drawdown huge sums in bonuses, salaries and dividends as opposed to reinvesting the funds back into the business. 

It can be a great way to enjoy the benefits of all of your hard work, but it shouldn’t be at the expense of any other investors. If this is for you, you’ll need to scale back dependence on other investors to allow you to pull out cash when you need it. Be warned, it isn’t for the faint hearted – it can be a hard balance to strike and the trade-off is high taxation and a reduction in the sale value of the business.

Keeping it in the family

For some, the dream of a business to pass on to future generations is the driving force behind them to build a successful company. Selling your business to family or friends has its good points and it’s bad points.

You can develop and mould your chosen successor over the years and ensure the transfer is smooth – you might even want to keep an advisory role in the company to keep an eye on how things are going. Be warned, you need to know your relationship can handle working together and all the stresses that brings.

The flip side is that they may feel obliged to take on the company and end up running it into the ground or they may not be up to the job, and as a savvy business owner you’ll want to do what’s best for the business. 

In bigger businesses your investors may not want to go down this route and you may find you come up against opposition, so planning in this case is key so everyone is on the same page.

Sell to the management or employees

It’s often said that the solution to the problems and dilemmas a company is often already in the business – and by that it means your employees. With a wealth of knowledge about your business, experience of the day-to-day and with strong customer relationships, selling to employees can be very beneficial.

It can offer a smooth transition without causing any major upheavals to upset the business operations or the staff. Plus, it can also offer a great way to keep your business legacy intact.

In some instances they may lack leadership, business acumen or managerial expertise and find themselves out of their depth which could be detrimental to the business. Planning for events like this by instigating a handover period to train up your successor can help to minimise the impact on your clients and customers, hopefully avoiding any negative impact.

Sell to your partners or investors

If you’re not the only one with a slice of the pie, it could be a great solution to sell your stake to your fellow investors. It’s a great exit strategy for you if you can find someone who’s willing to buy it. It can offer you an obstacle-free path out of the company and hopefully you’ll realise a decent profit from the sale of your share.

It’s not a given that an investor will want to buy you out so you may have to bide your time. Once you’ve agreed to step-down, make sure your exit strategy is in place so everyone knows what’s expected, as you gradually relinquish your responsibilities.

Selling on the open market

If you’ve decided that you would like to sell your business, it’s important that you have readied it for sale before you look to value it. Understanding the persona of who your likely buyer might be, and what you could do to make it more appealing to them, is a great first step to making your company as attractive as possible.

Selling your business assumes that someone out there will find your business an attractive proposition and will pay a fair price for it. Picking the right time to sell can be tricky and you have to be sure that all your figures can stand the scrutiny involved in the due diligence process.

As with selling a house, you need to ensure that you can justify the reasonable price and don’t try to hide any major cracks. Look to get it in the best shape possible to achieve the highest price. However, it’s not for the fainthearted and can be a stressful and time-consuming process. It’s recommended to hire a reputable broker if you don’t have experience in selling businesses.

Selling to another business

If you feel that your business is a suitable acquisition, maybe with a company in your sphere of expertise, then offering yourself for sale in this way can be a win-win situation for both of you. Businesses are bought for many reasons: growth, acquisition of expertise, technical rights, property etc.

In practice the buyer could just be interested in asset stripping and could close your business down within a very short time. It’s down to you whether you have faith in their motives, and be prepared in case it does turn out to be a bad move for your business and your employees. 

You maybe chose to negotiate a deal for the acquisition of your skilled team. It means your legacy might not endure, but you may be able to strike a profitable deal that takes care of your employees too.

A sale like this does put you in a strong negotiating position, helping you to achieve a higher price for your business but it can be a lengthy process, and the right business might not come along. 

Float your company on the stock exchange

Taking your business public can be a great exit strategy if market conditions are favourable at the time you’re looking to get out. The rewards if you take this path can be substantial, but in order to become a public limited company you’ve got a lot of hoops to jump through to get there first. It is highly regulated and becoming a PLC can mean your company is answerable to shareholders and opens you up to scrutiny from analysts and even from the media.

It is a high risk, high reward exit strategy but allows you the ability to raise additional capital by issuing public shares, and can make you attractive to a variety of different types of investors. 

Declare bankruptcy

If all else fails, this has to be the last resort when it comes to an exit strategy. It is there as an option when things go wrong. It’s not ideal and can leave your employees high and dry, not to mention burning bridges with your valued clients.

If your business is having a tough time, perhaps debts have mounted up and cash flow has become a problem, or market conditions have impacted your bottom line it can be a lifeline in the right circumstances.

It can come as a great relief to know that bankruptcy can write off the debts and remove your business responsibilities, but it might not be able to clear everything and can leave you with a credit file that is going to need some serious TLC to build back up again, impacting your future credit worthiness.

How do you choose an exit strategy?

The best exit strategy for you is the one that delivers what you want to achieve. Is it just a means to realise the value in your business, or does the long-term success of the company matter to you.  

So long as you understand that having an exit strategy is just as important as your starting strategy then you are halfway there. Be sure to give yourself plenty of time to achieve your goal. Plan, plan, plan!

Remember, an exit strategy should mean you become redundant. Letting go of the reins and handing over control can be tough, but it’s an important part of structuring your departure, so be sure you understand fully how this change is going to impact on your life and mental wellbeing. Scale back your role in a planned and gradual way, delegating more and more tasks as you get nearer to your expected exit date.

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