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Exit Strategies: Planning for Exit and Maximising the Value of Your Business

Exit strategies are a key part of a business plan and set out steps for your departure from the company, whichever situation this may be in.

Exit strategies are a key part of a business plan and set out steps for your departure from the company, whichever situation this may be in. It is largely advised that a person starts to plan their departure from a business well in advance of when they actually want to leave. In this article, we will look at planning the exit from a business and explore the key considerations to bear in mind to maximise the value of your business.

What is the purpose of an exit strategy?

In 2022, the number of UK private sector businesses numbered 5.5 million, yet only a fraction have an exit strategy. A business exit strategy lets you close the chapter on the project you poured your heart and soul into.

By developing your business exit strategy, you can extract the fruits of your labour and avoid leaving money on the table. Exit strategies provide a way to determine the actual value of your business and provide a roadmap for when to extract yourself at the peak.

Naturally, not every business departure is a happy one. If you are looking at liquidation, an exit strategy continues to maximise the value of your assets, allowing you to limit your losses.

Other benefits also exist outside of the context of bolstering the value of your business; but, overall, they are the driving force of growth, so founders often create an exit strategy when they are getting off the ground.

What business would need an exit strategy?

No business is exempt from requiring an exit strategy. Even though most people believe documents like succession plans are reserved for large public or private limited companies and successful company directors, this is not the case.

Even the smallest of businesses can benefit from defining a multi-pronged exit strategy that outlines the key metrics that would trigger the process of a founder exit. Yet 72% of business owners have no exit strategy, with reasons including:

  • Fear of letting go.
  • Fear of failure.
  • Fear of retirement.

The list goes on, but while passionate business owners may find the prospect of moving on uncomfortable, not having an exit plan can hurt you financially. Moreover, it can hurt any other stakeholders you have and your team.

In short, every business in every sector should have an exit strategy.

What to consider when maximising the value of your business

Reviewing Customers and Suppliers

By reviewing and assessing any issues with suppliers and customers, you are going a long way to mitigating any risk factors that are in place. By auditing suppliers and reviewing issues such as payment terms, value can be maximised as far as the sale of a business is concerned.

A review of debtors and credit and the control processes/customer terms combined with a review of creditors, suppliers, and payment terms is key to identifying any areas of concern that would benefit from being addressed ahead of the sale.

Ownership, Structure, and Protection Review

Reviewing the current company structure ensures that the current set-up maximises both the opportunity presented by selling businesses, but also the benefit from the best taxation structure on sale. It is also important to conduct a review of the protections currently in place, including shareholders agreements and issues such as power of attorney and take advice on what protection should be in place if it is missing.

Looking at the Succession Plan

Without yourself to run things, can the business still operate? Of course, a new buyer may run the business or bring in a new director or CEO to oversee things; however, this is not always the case.

A new owner may be seeking a business that can run itself. With this in mind, you should consider whether you have a strong management team ready to take over after your departure. Start integrating them into the day-to-day operation of the business as early as possible to give them the best chance of success and ensure a smooth handover process.

Remember to hand clients over to other staff and managers in good time if you are an owner which also oversees clients. This way, you give the business a good footing on which to move forward under the new regime.

Sales and Marketing Review

Fundamental to any business in sales, is the ability to attract income through marketing and, ultimately the sales flow. Prior to sale, a revamp and an audit of your sales and marketing strategies can result in either more leads and sales or more efficiencies to ensure the process is cost-effective.

Valuation

Before a sale, it is a good idea to have a figure in mind for what the business is worth. Of course, an advisor will be able to help you get the best possible price, but you should still manage your expectations throughout the process.

What have similar businesses in the market sold for recently? This is a good way to get an idea of a ballpark expectation, and you should also keep in mind your salary, which a new owner may adjust the valuation due if they need to pay a higher salary, e.g., the going rate for a managing director in the industry.

Property

Where the company owns property or where there is a lease in place, it is vital to review the best position based on the circumstances. For example, when selling a business, some sellers want to retain the premises or the property in which the company is housed. If a property is not extracted well in advance of a sale, the tax implications can be extensive and very costly.

In addition, it is very useful to review any assets and stock. These are key to maximising value, and establishing their monetary worth is important to all parties – buyer and seller. Ensuring they are accurately reflected is a way to maximise value on sale.

Basic Company Secretarial review

Making sure Companies’ House is up to date and that all the statutory books are current is something that should be done periodically but is often forgotten in the day-to-day consumption of running a business. Before selling, and during the initial process of selling, you should take care to identify any areas that require rectification. Doing this will reduce the risks of any potential buyer having any concerns, minimise hiccups in the sales process, and ensure as smooth a sale as possible.

How do exit strategies improve business value?

Exit strategies are designed to maximise your wins and mitigate your losses. Despite these core functions, only some business owners know what an exit strategy looks like or how it translates to pounds in their bank accounts.

In terms of increasing the value of your business, exit strategies display their qualities in two categories.

When building:

While establishing your business, you likely had a set goal. For some entrepreneurs, this could be preparing a core concept for sale as a project to a large multinational. Others may have set the goal of leaving on a high when they bring their brand forward for an Initial Public Offering (IPO).

Regardless of your goal, an exit strategy helps drive growth, which subsequently amplifies the value of your business.

The reason behind this is that comprehensive exit planning is a fluid process. Founders usually have timelines for an exit plan to be audited, reviewed and updated to reflect where their organisation is currently, but circumstances change constantly.

Each exit plan will involve a root-and-stem review of every facet of the business. It will ensure that it is structured optimally, run efficiently and can be run autonomously without having your hands on the wheel 24/7.

During the exit planning process, you will consult with advisors, including a corporate advisor, a solicitor and a tax specialist. The purpose of these professionals is not just to check for compliance but to recommend where you can improve.

This could include:

  • Identifying new market opportunities.
  • Minimising your corporate tax bill.
  • Implementing new technology.
  • Improving your workforce.
  • Changing your management structure.

But what does any of this have to do with exit planning?

Exit planning is designed to evaluate your business and its worth. It involves defining the trigger point when you will consider an exit and how close you are to that point. It will also include reviewing whether your existing exit strategy is still fit for purpose.

For example, many founders have postponed their retirement plans, including their exit plans, because they believe they can take their businesses to new heights after a comprehensive review.

When selling:

Do you know how much your business is worth?

The chances are you either know you don’t or your valuation is way off. The numbers bear out this fact, with 98% of business owners not knowing what their business is genuinely worth.

Hard numbers inform your exit strategy. By the end of the exit planning process, you’ll have numbers you can rely on. This is critical because there is an entire industry built out of buying businesses for a fraction of the value, relying on insultingly low offers and ignorant entrepreneurs.

Most business owners would jump at a £5 million offer for their stake and a chance to become an overnight multi-millionaire; but, if your stake is actually worth £15 million, this is an enormous loss. Exit strategies are designed to avoid this from happening.

With an exit plan, you know precisely what you are worth, and crucially, you’ll be able to back up your asking price with supporting facts.

What impact does an exit strategy have on a business sale?

The obvious benefit is that you will get a price that reflects the authentic value of your organisation. You know what you are worth and are protecting yourself against being bamboozled by a predatory buyer looking for a steal.

Additionally, exit strategies provide guidance to ensure a smooth transition. Countless mergers and takeovers fall at the final hurdle because of legal complications, administrative problems and general incompetence.

With an exit plan by your side, you and your leadership team have a field plan outlining everything you need to do if you decide to cash in.

On a side note, exit strategies can make your business more attractive to investors. Since so few founders have them, it demonstrates that you are a cut above the rest, making it likelier that you are operating a well-run business.

In Summary

There are a number of considerations to make when you are planning an exit from the ownership or management of a company to maximise the value of your business. Reviewing suppliers and customers, addressing any issues with property, and conducting a structure and management review are all ways to ensure you can exit having maximised the business’ value.

This might be something you’re not too familiar with, you may be hesitant to explore your options. It’s still crucial to find a path that suits you, especially with critical decisions such as an exit plan. Here, we delve into everything you need to know about exit strategies and how to create one for your business

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