Business exit strategies are one part of business that few entrepreneurs pay much attention to for one reason or another.
According to a survey in the Harvard Business Review, present bias saw 70% of entrepreneurs admitting to paying little to no attention to their eventual exit; but the fact is that you never know what can happen. An exit strategy is a critical contingency, whether a sudden acquisition interest or a serious illness.
Let’s examine some of the reasons why you need an exit strategy now.
What does a business exit strategy include?
Around 70% of UK businesses have been operating for less than ten years, demonstrating that exits are not all that uncommon. Planning for an exit is integral to weathering any storm.
What should an exit strategy actually consist of though? In a nutshell, your exit plan must contain six essential components:
· Business, personal and financial goals.
· Detailed business valuation.
· Plans to enhance business value prior to exit.
· Analysis of different exit options.
· Tax planning to minimise exit-related losses.
· Action plan for preserving business operations, such as position transitioning, during your exit.
This is merely an overview of some areas to focus on as part of your exit strategy. The process is highly complex, so hiring an exit consultant should be part of your plans.
How do business exit plans benefit a business?
Business exit plans benefit both the departing entrepreneur and the business itself.
Here’s a rundown of the advantages of a business exit plan for your organisation:
· It guides how you will manage your company’s future.
· Preparing your timing to maximise value.
· Offers a mental break so that you can depart with no regrets.
· Ensures the business continues operating after you’re gone.
· Minimises disruption during the exit process.
· It provides clear direction for those you leave behind.
· Maximises your business value.
In short, it acts as a shield against chaos. If you’re the heart and soul of your company now, any departure can be traumatic, but with a plan in place, you can achieve a smooth exit and cement your legacy.
Why you should create a business exit strategy now
If you lack an exit strategy but are thinking about one, you’re already way ahead of your peers. Approximately 48% of business owners have no exit strategy in place at all.
On the other hand, why should you have an exit strategy if you are not planning to depart shortly? Here are some of the advantages of creating an exit plan as early as possible.
1. It could increase business profitability
Core to business exit planning is reviewing every aspect of the business, ensuring that it is run efficiently and structured correctly.
Since exit planning is conducted with external advisors, it’s an opportunity for an expert to take an objective view of your business. During the planning stage, your advisors will also recommend areas to improve upon to maximise the value of your business.
Even if you have no plans to leave, going through this process can highlight areas to focus on that can enhance how you do things.
2. It will tell you what your company is worth
Anyone who has ever watched an episode of Dragon’s Den knows that the average business owner has little realistic idea of what their company is worth. Typically, most entrepreneurs believe their company is far more valuable than it actually is.
Part of exit planning will involve a comprehensive business valuation; but the value in this is in understanding that businesses are worth more or less depending on the types of buyers.
Working with a corporate specialist who can value your business provides a starting point for enhancing its value to your target audience.
3. It will provide focus
Exit plans create areas to concentrate on like nothing else, doubly if others also stand to gain.
One of the most commonly employed strategies is an employee share scheme, whereby employees benefit from selling the business. These schemes enable companies to retain key staff and motivate them to contribute toward a high-value exit.
In-depth exit planning can act as a launchpad for motivating your team to grow your business in the months and weeks leading up to an eventual sale. Moreover, it helps to make your employees feel part of the process.
4. It will enhance your readiness
What if you have no plans to leave your business?
Many managing directors have no plans to leave, but you never know what’s around the corner. It could be a serious illness that forces you into retirement, or it might be death. Exit planning provides a clear plan for what happens to the business if you are forced out.
As morbid as that sounds, being ready is essential in other areas. For example, say you have an innovative tech startup already making waves. What happens if Microsoft or Facebook contacts you asking about a potential acquisition?
Exit planning tells you what to do if something unexpected happens.
5. It maximises your gains
To use our tech startup example, how do you proceed if an acquirer approaches you out of the blue with an offer, as has happened countless times throughout history?
Although an acquirer may offer you a few million pounds for your business, you still may be leaving money on the table. Exit planning tells you what your business is genuinely worth, thus putting you in a stronger negotiating position.
Business history is littered with people who sold for far less than their business was worth, and plenty of investment companies have made fortunes on green-lighting business bargains.
For example, Facebook bought WhatsApp for $19 billion in 2014. Whilst this seemed like a staggering amount when it had 600 million users, it possessed two billion users just six years later.
Analysts have since changed their minds and now believe that the original owners of WhatsApp made a massive error in settling for $19 billion.
6. It achieves a smooth transition
Readiness can also increase the value of a business during a sale. Buyers are more likely to pay a premium if you can show that your firm has everything it needs to operate without you.
This means having a structure that allows a leadership team to take over and for the business’s operations to run like a flywheel.
Why is this what buyers want to see?
· Reduces their integration costs.
· Increases the likelihood of making an immediate profit.
· Ensures they have to do less work to make your business work after you leave.
Smooth transitions, however, only happen through early planning. Not everyone has a business exit plan from day one, but they do have them years in advance of a founder departing.
Remember, exit planning isn’t final. These strategies are fluid and constantly updated over the years to reflect the firm’s current state. You don’t purchase home insurance because you expect your home to collapse. You buy it on a just-in-case basis, and the same goes for business exit plans.At Hilton Smythe, we specialise in supporting UK company directors planning for the future with access to business exit consultants and resources. To learn more about what we offer to business owners, speak to the team today.