Business partnerships present a golden opportunity to bring a wealth of extra resources and knowledge to the table. In many cases, you can accomplish more than you would by going it alone.
According to the Federation of Small Businesses, 7% of UK businesses consist of ordinary partnerships, meaning thousands of businesses become profitable through the efforts of two or more entrepreneurs coming together; but what happens when partnerships go south?
Planning an exit strategy for a partnership is critical to claim your portion of the proceeds and enable a smooth exit. This guide discusses how a partnership exit strategy works.
What is an exit strategy in a partnership?
Turbulent economic times are hitting the UK business landscape, altering how firms nationwide approach their futures. It should come as no surprise that many managing directors are considering whether it’s time to exit stage left.
According to the latest stats, approximately 480,000 businesses are in significant financial distress, meaning many exit plans may be triggered in the following 12 months. This conversation brings us to the discussion of comprehensive exit planning.
Planning to reduce or liquidate your stake in a business is not cynicism but smart business. If you’ve not considered your exit plan, you could be risking your money and legacy.
How important is a business exit strategy?
Business exit strategies are your contingency plans for exiting a business in any number of ways. They plan for the probable and the improbable, providing you with a battle plan to exit your business with minimal fuss.
According to corporate finance specialist Jeff Barber, “It can take many months to plan a business sale effectively, but it is advisable to consider an exit strategy as far ahead as possible – even several years.”
Not having an exit plan means you’ll find yourself making things up as you go along, which is never a recipe for success.
Although you may dream of planning an exit after a long period of success, life doesn’t always work out that way. Some of the scenarios that could turn your plans on their head include:
· Industry collapse.
· Acquisition interest.
· Financial crises.
· Sudden death.
· Partnership disputes.
You cannot plan for any of the above with any degree of certainty, but with an exit strategy, you have direction if the worst should happen.
What are the risks of not having an exit strategy?
The developed world is broadly similar in that entrepreneurs are wholly unprepared for exiting a business. If we examine statistics from the U.S., 66% of businesses don’t have an exit plan, which is similar to the nearly one in two that don’t have one in the UK.
Every company that lacks one of these plans is assuming significant risk. If you’re unsure whether it’s worth the time or the effort, here are some risks of not having an exit strategy.
1. Not getting what you want
Most business owners have an ambition for their business. Perhaps they want to drive it forward and then use the proceeds to retire, or they want to purchase their dream home using their successful venture.
Whatever your personal and financial goals, an exit strategy factors those into the equation. Without an exit plan, you risk selling for less than what your stake is worth or being unable to break from the business when you initially planned.
Exit plans help you accomplish your goals and depart on your terms.
2. Reduced business value
Countless investment companies have made fortunes by buying businesses for a fraction of their worth.
They take advantage of the fact that most entrepreneurs have little clue what their business is worth. However, an exit plan clarifies the actual value of your firm and provides guidance on how to enhance its value before your exit.
3. Not mentally ready to leave
Owners often see their organisations as part of their identity, which makes it extraordinarily difficult to leave it all behind.
With no firm plan, owners quickly work longer than expected, preventing them from spending time with friends and family.
Business owners with an exit plan draw a line in the sand that enables them to mentally prepare to leave far in advance of their actual departure.
4. Losing your legacy
Whether it’s a family business or not, most managing directors dream of creating a legacy in the form of a business that operates after they’re gone.
The problem is that without any planning, making the transition becomes extremely difficult. Moreover, since so many founders are the heart and soul of their businesses, a sudden departure can lead to everything you’ve built falling apart in a few short months.
Exit strategies empower your firm to stand on its own two feet without you and provide an action plan for passing on your brand into a pair of good hands.
5. Mistiming your exit
Comprehensive exit planning offers a rough timeline for your departure. They account for economic conditions, industry trends and the lifecycle of the business.
Selling up at the wrong time can lose you countless thousands in the process. On the other hand, leaving when your business isn’t physically ready can compromise its future.
In the worst-case scenario, a mistimed exit can result in the liquidation of its assets.
6. Falling victim to a dishonest buyer
Waiting for a buyer, accepting an offer and signing a piece of paperwork. Selling a business should be as simple as that, right?
In an ideal world, yes, plenty of predatory buyers are looking to acquire assets from clueless business owners. Exit planning gives you the numbers and know-how to understand when dealing with a dishonest buyer.
This includes averting issues that can damage your firm and shareholding like:
· Selling your stake for its true value.
· Protecting the confidentiality of your business.
· Preventing costly and time-consuming litigation.
7. Failing to achieve your value goals
Value goals are objectives extending beyond financial gain. When some owners decide to leave, they want to benefit other parties, such as:
· Providing gifts to their employees.
· Contributing to charity.
· Doing something good for their community.
A lack of planning can stop you from achieving these goals for one reason or another. Again, an exit plan takes your non-financial goals into account.
8. Lacking the time to sell the business
Any exit is a meticulous process. Rushing it can lead to missing vital points, ultimately impacting your firm’s value and your ability to leave it behind.
Without an early-stage exit plan, it may be too late to prepare your company for a sale and a transition. Sudden exits rarely end happily, so it makes sense to consult an expert and have all your ducks in a row.
Why should you plan for a business exit in advance?
Experts frequently talk about planning your business exit as early as possible. Some even suggest having a comprehensive exit plan within the first six months of starting your business.
Ideally, an exit plan should be prepared between three and five years before your exit. The benefits of planning in advance include:
· Gain more control over your exit.
· Ensure you get what your business is worth.
· Provide certainty for your organisation.
· Make sure you have covered all the bases.
· Enable yourself to approach any exit calmly.
Hilton Smythe strongly recommends that every business have an exit plan as early as possible. These strategies are fluid, with plenty of wiggle room to update them as your circumstances change.However you choose to exit your business, consulting with experienced professionals is critical. To learn more about formulating an exit strategy that you can rely on, speak to our team now.