How to Create an Exit Strategy | Hilton Smythe

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Creating an Exit Strategy

As an entrepreneur, it’s crucial to be constantly searching for fresh strategies to implement into your business – after all, there’s always room for improvement.

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

What are exit strategies for a business?

While you may have heard the term, you may be unsure about the specifics. An exit strategy refers to a plan that is in place for when you decide to call it quits with your business. There are multiple reasons why someone may decide to leave a company behind, so it only makes sense for there to be a range of exit plans that you can implement, including:

  • Merger and acquisitions: your business is acquired by another company or your businesses merge as one.
  • Selling your control: when you sell your share of the business to your partner
  • Initial public offering (IPO): if your business is private, this refers to giving the public access to allow them to purchase shares of the business
  • Acqui-hire: your business is bought due to the skills and talent of the employees within the company.
  • Family succession: a family member becomes the new owner of your business
  • Management buyouts: a member of management buys the business
  • Liquidation: when you put an end to the business as it is no longer making any profit. Assets are sold to make up for any debts.
  • Bankruptcy: usually the last option of plans to end the business and assets are seized to compensate for debt.

Should you create an exit strategy?

There’s no doubt you want to be prepared for your business’s future, but you may be unsure how to create an exit strategy. However, there are several things to keep in mind when it comes to implementing your exit plan.

While the future is unpredictable, having a target date for when you expect to leave the business will help. This will allow for a smooth transition – perhaps the new owner needs to see how the business runs on a weekly basis, or training is required for a family member who is taking over the company.

Consider your expected achievements by the time you plan to leave your business. Doing so will allow you to either decide which plan you choose, or whether the plan you have already determined is the most suitable route or not.

Requesting feedback from employees and clients will make the business more attractive to buyers, as they can see up-to-date satisfaction from workers, which will help the transition to be as efficient as possible. Plus, the new owner can assess any necessary improvements.

Publish your plan so that those involved in the business, like employees, stakeholders, or even prospective buyers, are aware of the end goal. Doing so provides opportunities to add timeframes for any tasks within the company to keep maintaining the goals of the business.

Why do business owners create exit strategies?

There are multiple benefits that owners can reap with an exit plan.

Employees are an essential part of any business, and owners can use an exit plan to provide protection for them. Whenever you leave your business behind, an exit strategy gives employees peace of mind knowing that their job is safe as a new owner joins the company.

An exit plan provides control and makes the stressful life of a business owner a little bit easier. If you need to act quickly, for example if your profits are sky-high, you have the opportunity to sell your business at a faster pace than if you didn’t have an exit strategy.

Financial loss is limited with an exit strategy. For example, there could be a change in your business’ market, and you realise that you need to leave the business behind to avoid financial failure. With your exit plan in place, you can reduce your loss by having the freedom to move quickly – and you can assess the future of your business by staying in the know of any adjustments in the market.

Once you know what an exit strategy is, there’s essentially no reason to delay implementing one into your business, given its benefits. Whether you choose to leave it with your family or decide to sell, there’s a range of options to choose from. Speak to Hylton Smythe today to see how we can help you sell your business.

What to consider when planning an exit strategy

Exit strategies rely on careful consideration. With only 2% of UK high-growth companies planning a successful exit within five years, it can be challenging to achieve your goals.

As part of your ruminations, you must ask three key questions.

When do you want to exit?

The time frame influences both how and when you depart your business. You need sufficient time to plan your exit, including choosing which projects match your goals.

For example, if you want to retire in the next three years, it makes little sense to assume command of a long-term project.

So, what makes your firm exit-ready?

  • Financial Performance – Revenue, debt, and profitability are the key factors buyers will look for when evaluating your financials. Will your business be ready when you want it to be?
  • Budget and Forecast – Creating clear financial plans will help you measure whether you are on track for a successful exit.

How do you want to exit?

Every business owner will have their desired exit type. For example, there were 5.1 million family-owned businesses in the UK in 2018, so it makes sense that many successful directors may want to pass their organisation to a child or grandchild.

Various other exits exist, too, including:

  • Selling to a strategic buyer.
  • Selling to an investor.
  • Going public.
  • Leveraged buyouts
  • Liquidation

How much do you want to sell for?

Exit planning allows you to sell your stake and exit the business while making a profit. Exit planning lets you set feasible exit goals by determining a value for your stake based on reality.

Note that determining the business value is only a part of the process. In most cases, the expected sales price is usually more than the company’s market value.

It’s the sale price that determines the timeline if you have yet to reach your desired figure.

How important is exit strategy planning?

Exit planning is vital for various reasons. It does more than just enable a smooth transition when you decide to leave. It also drives your firm’s direction.

Some of the reasons why exit strategies are essential include:

  • It allows you to move quickly should the time come.
  • Reveals the actual value of your business.
  • Provides direction for the future.
  • Maximises the sale price when selling.
  • Mitigates losses if your company is being liquidated.
  • Demonstrates to investors that you are operating a well-oiled machine.

What type of businesses need exit strategies?

In short, every business requires an exit strategy. It’s a fact that applies to large multinationals within chemical engineering and oil extraction to small retail operations.

Exit strategies are highly versatile, allowing you to plan for the future and define the terms of your exit.

Without an exit strategy, you risk not getting what your stake is really worth. After all, most purchase offers are typically far lower than what your business is valued at. This is because most business owners have no inkling of what their organisation is worth, and savvy buyers take advantage of that knowledge gap.

By preparing an exit plan, you understand your business’s worth, the current market, and how to embark upon the process once the time comes. Crucially, when entering negotiations, you know why your price is valid.

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The exit strategy process

Regardless of your industry, the optimal exit strategy aligns with your objectives. Exit strategies are fluid and require years of preparation to enhance their usefulness.

In most cases, company directors will develop more than one plan. These are often split into voluntary and involuntary categories. In other words, you will have separate plans for selling to a strategic buyer and being ousted via liquidation.

Due to the infinite options that come with exit planning, the following steps are merely a skeleton to guide the process.

1. Prepare your financial records

The first step is to acquire an accurate picture of how much the firm is worth right now. Without knowing what your organisation is worth, it becomes impossible to sell it knowing you have extracted every pound possible.

Generally, it is best to call in an external business evaluation specialist to conduct the audit to avoid the risk of bias. As part of this process, a valuer should have access to up-to-date records relating to the following:

  • Governance
  • Human resources
  • Business plans
  • Intellectual property
  • Employment
  • Licences
  • Certifications
  • Leasing
  • Investments

A proper record-keeping system will prove its worth during this process. Remember, an independent valuer can only provide you with a value based on the available facts. You cannot expect an accurate figure if anything is incomplete or missing.

2. Prepare your current employees

Departing means that there will be shifts within your company’s hierarchy. It could mean a senior leader moving up the ladder or preparing to serve under someone else.

Unless you are liquidating the company or preparing for bankruptcy, you owe it to your team to prepare them for the future. It could include building your workers’ skills or reviewing existing processes to make them more productive.

Taking these steps early is beneficial for increasing your business’s value and demonstrates to potential buyers that your firm does not rely wholly on you to operate.

3. Bring in expertise

Transitioning from one business chapter to another requires a team of experts to manage every facet of the process.

With the right team behind you, you will have the knowledge and skill to confront the obstacles of driving your exit. Some of the positions you should consider filling include:

This also includes filling the top jobs in finance, marketing, technology and information. Every exit is different, but by covering all the bases, you will increase your chances of completing your exit successfully.

4. Evaluate your options

With a firm view of your finances and a team surrounding you, everything you require is now in place to make your exit plan a reality. This is where your strategy will vary based on your business, industry and circumstances.

Your strategy is unique to your company and its goals. Some of the options available to you include:

  • Launching an Initial Public Offering (IPO).
  • Facilitating a management buyout.
  • Preparing a merger and acquisition exit.
  • Transitioning out of your role in favour of a family member.
  • Initiating liquidation or bankruptcy proceedings.

Every type of exit will come with its foibles, so evaluating the pros and cons of every possible solution is pivotal to maximising your stake and preserving the future of the project you built.

5. Maximise your business sale price

When finding a buyer and dealing with all the paperwork, the goal should be optimising your business’s operations.

Concentrating on areas of monetary value will increase your company’s market price and strengthen your hand during negotiations over price. Some of the ways you can do this include:

  • Showing that your product/service understands the needs and wants of your customers.
  • Leaving no stone unturned in identifying areas of improvement.
  • Paying down or restructuring more of the company’s debt.
  • Limiting losses to tax.
  • Focusing on efficiency improvements.
  • Creating plans for the company’s short, medium and long-term future.

While these actions are always essential, they should continue even when negotiating the sale of your stake in the company. Doing so demonstrates that this is a worthwhile project operated by someone dedicated to excellence.

Ultimately, this is the mindset that will see you rewarded for all your hard work.

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