Exit strategies consist of plans to enable you to handle significant transitions in your business activities. They range from passing your business on to family members after you retire, to selling your stake.
But one-third of all UK directors aged 60 and over have no exit plan, leaving their businesses at risk of severe disruption. While nobody wants to think about the end of their involvement in a business, exit plans are critical to maximising your gains and limiting your losses.In this guide, you will learn about the value of business exit strategies and the various options available.
What are business exit strategies?
Exit strategies for businesses are precisely what you expect – they are a plan for exiting your business under various scenarios.
Business owners can use them to value their businesses, put themselves in powerful negotiating positions and limit their losses if a venture has reached the end of its lifespan. With 60% of all UK startups failing, it makes sense to plan for the best and worst-case scenarios.
Exit strategies can also be used by traders and investors involved in a particular business.
The sole goal of any exit strategy is to either maximise gains in the event of a win, or limit losses if things have taken a turn for the worst. Additionally, your exit strategy can outline the win conditions for when you have extracted sufficient value from a project.
Exit strategies, however, require extensive time and resources, including envisioning where your business is going, where it is now and where you want it to go.
When should you plan your business exit strategy?
What does it take to be one of the 10% of business owners who exit an organisation successfully?
Firstly, you need a plan. Exit planning is a proactive action, not a reactive one. For example, how can you expect to get the highest value for your stake in a business if you are exit planning in the midst of negotiations?
According to Morrinson Wealth, the ideal time to prepare your exit strategy is between three and five years before your intended exit; your intended exit being based on your overarching business strategy.
In practice, this means preparing an exit strategy during your business’s startup or early growth phases. Moreover, your exit strategy should be audited at intervals to ensure its relevance to the firm’s current state.
Are business exit plans important?
While some may not want to consider the end of their time with a business, others don’t see the benefits, and this leaves them vulnerable to leaving money on the table or sustaining a more significant loss than necessary.
With that in mind, here are some of the reasons why every company should have an exit plan:
- Provide a smooth transition when you decide to step down, whether you are passing your organisation to a family member or a third party.
- Define clear goals for where you want your business to be in the years to come. It focuses your attention and enables you to aim high.
- Manage your finances so that you can plan your financial future, which could include share dividends or a lump sum to fund your retirement.
- Produce a realistic assessment of the value of your business and offer reasoning to support your figure.
- Prepare psychologically for the conditions that must be met for when you should step down.
- Acquire fiscal foresight and show buyers that you are running a well-oiled machine.
Exit strategies benefit you, your workforce and your brand. They ensure that you will never be caught by surprise, whether turning your limited company into a public entity or managing the gradual liquidation of its assets.
In today’s business landscape, exit strategies are the mark of a director ready for anything.
Speak to the experts
Plan your Exit Strategy TodayTypes of business exit strategies
Understanding your exit strategy begins by educating yourself on the most common exits available. Ideally, your firm will have exit plans that cover each scenario.
By setting the wheels in motion, you can keep one eye on the future, whether your business is experiencing turbulence or on a rocket ship to the moon.
In this section, we will discuss seven of the most common exit strategies and list both their strengths and weaknesses:
Initial Public Offering (IPO)
An IPO is the original goal of many startups and small businesses. Organisations that reach this point are preparing to transition from being a private limited company into a brand available to public shareholders.
IPOs see massive cash injections and take on brand-new responsibilities, requiring a complete shift in setup and thinking. Whether you intend to bow out gracefully or remain on the board of directors, you need a plan.
Pros
- Raise large amounts of capital to enable your business to grow.
- Cash in your share of the business.
- Oversee the transition to an operation with more capabilities.
Cons
- IPO exits are among the slowest because of all the red tape.
- Cope with regulatory requirements and costs.
- Difficult to secure for most businesses.
- Added burdens of worrying about stock performance.
- Increased pressure and scrutiny from shareholders and the general public.
Mergers and Acquisitions (M&As)
Mergers and acquisition exits involve significant negotiation and upheaval because another operation will be amalgamated with yours. Whether you are acquiring another business or being acquired, M&As can involve entering a new market, taking on new assets, or wiping a competitor from the board.
Under a merger, you will likely remain in your current position to get the new business off to the right start, which will require transition planning. Alternatively, if a larger competitor is acquiring you, your role may change because it’s highly likely you will be relinquishing at least some control.
Pros
- Potential for a highly profitable exit.
- Retain a large amount of control before your exit.
- Oversee the transition into a more valuable operation.
Cons
- M&As can be costly and time-consuming.
- Reasonable probability of falling through at the last moment.
- Expect uncertainty over job security and conditions amongst your employees.
- Non-compete clauses may prohibit you from creating or joining a competing business later.
Management and Employee Buyouts (MBOs)
Alternatively, some business owners sell their businesses to the current management team or employees. This has the obvious benefits of being simpler to negotiate and prepare for because you are selling to a “friendly buyer.”
This is often similar to passing to a family member or a known investor. In many cases, the value of your stake and what the organisation will look like following the transition will be defined years in advance.
Pros
- Amongst the fastest types of business exits because you are working with a friendly buyer.
- In many cases, the owner will retain a stake in the company, even if their day-to-day input in the future is limited.
- Minimal disruption because the new team taking over is the same as the old team.
Cons
- MBOs won’t work for every business because they rely on a long-standing team with sufficient interest in taking over the business.
- Requires adequate preparation to ensure every senior leader is prepared to take the helm.
Friendly buyer takeovers
These business exits are similar to MBOs because you are selling to a known party. Friendly buyer takeovers could involve selling to one of your business partners, a current investor, or passing the business to a family member.
These takeovers are also relatively quick to handle and involve minimum pressure. However, friendly buyers rarely purchase a business stake at the actual market price, which may not be ideal for some entrepreneurs.
Note that family exits, or legacy succession, possess the same pros and cons as MBOs or selling to known buyers, but the risks tend to be heightened. It’s why many entrepreneurs choose to prepare their eventual successors for the role years in advance.
If bringing in a spouse, child, or grandchild, you must dedicate ample resources to showing them the ropes and putting them in a position to take over. Moreover, you should also prepare existing stakeholders and ensure they give your line of succession their blessing, or it could lead to conflict during and after the takeover.
Pros
- Minimal disruption by selling to a friendly buyer.
- One of the fastest business exits available.
- Relatively simple transition.
Cons
- Typically involves selling your stake at below market value.
- Dependent on finding a willing party to step in.
- The risk of blending family and friends within the business can lead to issues later.
Acquihires
Acquihires are less common types of exit because the individual or business acquiring your company has little interest in its assets. Instead, it is more interested in acquiring your company’s employees.
These business takeovers are relatively rare in most industries, with the majority occurring within sectors involving highly skilled and talented employees. If you receive an offer for an acquihire takeover, you have different considerations compared to other exits.
Pros
- Acquihires can be highly lucrative when handled correctly.
- It helps to protect jobs, ensuring that your team will still hold their positions later.
- Relatively easy to negotiate because there are no discussions regarding physical assets.
Cons
- Very difficult to find this type of buyer in most sectors.
- Costly to set up and execute.
- This can still lead to job insecurity for less skilled employees.
Liquidation
The previous five exit strategies focus on successful business owners looking to acquire the maximum value from their labours. Unfortunately, not every venture leads to a roaring success.
If you fail to make a profit because your business is performing poorly, you may be looking at a liquidation exit. Under this type of exit, you require a plan to sell off all your assets to settle your debts and guarantee that your shareholders are paid in full.
While better ways to depart your business exist, a proper exit strategy can protect your finances.
Cons
- Liquidation is a low-value exit strategy that could leave you with nothing.
- Significant implications for your employees, partners and customers.
- You may experience reputational damage that lingers for years to come.
Cons
- Liquidation is a low-value exit strategy that could leave you with nothing.
- Significant implications for your employees, partners and customers.
- You may experience reputational damage that lingers for years to come.
Bankruptcy
Finally, you have the bankruptcy exit. This type of exit is the most final of finalities because it spells the end of your business with no chance of acquiring any value from your exit.
Thankfully, this is one type of exit you don’t need to prepare for because bankruptcy means everything is sold, everyone loses their jobs, and the business comes to an end. The process and the endpoint are the same for every type of business, regardless of size.
As a founder, declaring bankruptcy is the last resort for a failed venture.
Pros
- You can absolve yourself of the business’s debts.
- Debt holders are frozen from pursuing you while the official bankruptcy process is worked out.
- Many founders feel relieved after concluding a bankruptcy exit because it spells the end of sleepless nights.
Cons
- Massive implications for employees, partners and customers.
- Enormous reputational damage to founders and investors.
- A potential ban of three years on your ability to operate as a company director if you are also declared personally bankrupt.
- Your business credit rating will take a considerable hit.
Prepare your exit with Hilton Smythe
Exit strategies encompass practically every scenario in the book. While you cannot plan for every possibility, you can ensure you have the tactics available to help you negotiate everything from IPOs to bankruptcy.
If you are thinking about your future and that of your business, where do you get started?At Hilton Smythe, our team of experts can liaise with you and your team to strategise for whatever the business world might throw at you. Contact our team now to set up your initial consultation.
