Exit planning is one aspect of business that founders often refuse to think about.
According to one study of entrepreneurs, 90% of founders believed that less than 25% of startups would succeed within five years. Despite this near-unanimous agreement, very few entrepreneurs have a plan for what to do after they leave their existing businesses. Most amazingly of all, 48% of entrepreneurs who have plans to sell their businesses still don’t have an exit plan.Exit planning is critical to planning for the future, and in this guide, we discuss the purpose of an exit plan and why every entrepreneur should have one.
Who would need an exit plan?
Everybody running a business needs an exit plan. While your initial exit plan may never come to fruition, it’s vital to have it there.
Most entrepreneurs will plan for an exit by accounting for the following circumstances:
- Sale of equity
- Being acquired by another company
- Selling the organisation
- Employee/management buyout
- Financial failure
- Generational planning
Whether you decide to sell your company and retire, or move onto greener pastures, exit planning is something every business owner can benefit from.
Why do entrepreneurs need an exit strategy?
Nobody wants to temper their enthusiasm for an existing project by thinking about how they will depart from it at an undetermined date, but exit planning offers tangible benefits for every entrepreneur.
The primary reasons for you to develop an exit plan now include the following:
Even if you have no intention of leaving your current position, unexpected events could change your mind. For example, what if a major multinational corporation suddenly wants to buy your business? Pre-planned exits enable you to understand your value and make informed decisions on how to proceed.
Planning for every outcome enables you to plan proactively with the future of your business in mind.
Moving on from a business is a complicated process requiring considerable preparation. Proper exit planning ensures you have a clear path for decoupling yourself from your organisation.
Planning for the Worst:
Retirement, ill health, and death are among the most common reasons an entrepreneur may want to get out of an existing business venture. Exit planning accounts for any and all unexpected circumstances.
Prevent Financial Failure:
If a quick sale is necessary, exit planning can defend against financial losses and ensure you maximise your sales value.
Exit planning is a fluid process that allows you to do what’s best for you, your family and your company. Committing to it now guarantees that your business receives what it’s worth when the time comes for you to call it a day.
What do entrepreneurs need to know about exit plans?
Business exit strategies are big business in the UK. In 2021, startup exits accounted for £26.7 billion, five times more than in 2020.
So, how do you form one?
The first step to developing your exit plan is knowing what it is. At its heart, an exit strategy is a strategic plan to sell your ownership in a company to another company or investors. It allows you to reduce and liquidate your existing stake while maximising your gains.
Whether your business is successful or not at the time of a sale, an exit strategy enables you to get the most value for your project. If you are successful, expect a substantial profit. If you are not, an exit plan will limit your losses.
These same plans are also used by investors like venture capitalists to plan for a rapid cash-out of an investment.
Despite the advantages of exit plans, only 24% of UK business owners have carried out the work necessary to develop a written one; but, even with these low figures in mind, you must know that creating an exit plan isn’t the end of the process.
Workable exit plans require up-to-date figures from within the business, including sales figures and reliable financial forecasts. Establishing an exit plan is step one, but committing to constant reviews is critical to maintaining its value.
Just some of the factors that could necessitate a change to your exit plan include:
- Macroeconomic conditions
- Microeconomic conditions
- Unexpected financial results
- Business expansions
- New shareholders
Even the slightest change to your business’s prospects could require altering your exit plan. Failure to do so means your exit plan is little better than not having one at all.
Types of business exits that entrepreneurs should consider
Business exits can arise from any number of scenarios, so a comprehensive exit plan accounts for every significant trigger.
This section will cover eight distinct types of business exits entrepreneurs may be considering.
Mergers & Acquisitions
Mergers and Acquisitions cover what will happen if an investor, buyer or another company wishes to purchase your company.
Under these deals, entrepreneurs may agree to stay on as an employee or completely disconnect from their business.
These are among the most potent exit strategies because you control price negotiations and set your terms.
Selling Your Stake
Liquidating your stake as part of a multi-owner company means that your business continues to operate, but without any further input from you. Otherwise known as “friendly buyer” buyouts, these exit strategies typically assume you are selling your stake to a known and trusted purchaser, such as a partner or investor.
These exit plans aim to keep the company running with minimal disruption. Furthermore, they may also account for a “less objective” sale, meaning that you may be preparing to sell your stake to a partner at a lower value than if you were planning a merger or acquisition.
Family succession, or legacy exits, aims to keep the ownership of a profitable business within the family circle. Typically, these exit plans involve passing ownership of a private company to a spouse, child or grandchild.
These exit plans factor in transition periods for the person intending to take over the business. If you have external investors, these exit plans must be discussed to ensure that passing it along the family line is acceptable to all.
Acquihires are special transitions involving purchasing a company purely to acquire its talent roster.
These types of takeovers are ideal for skilled employees and give you the confidence that everyone will still have a job after completing the process. However, these types of takeovers are challenging to find in most industries.
Management buyouts involve a purchase of the company by those who are already working there. In most cases, the transition period is simple because all involved intimately know how the business operates, thus giving it a greater chance of success after you are gone.
Moreover, the handover process is likely more straightforward than dealing with a third party. On the other hand, your exit plan must account for significant changes in management at all levels, which could cause severe disruption if not handled correctly.
Initial Public Offering (IPO)
IPO exits are often viewed as a dream come true for entrepreneurs because of how lucrative they are. However, these exits are among the most challenging because while private investors may spot your potential, the same may not be said for the wider industry.
Be prepared to factor in higher regulatory costs, greater pressure and more scrutiny from shareholders.
Any exit plan must accurately account for the added obligations of transitioning from private to public entities.
Failing businesses may experience a liquidation exit. This exit strategy aims to close the business, sell its assets and pay off any debts/shareholders.
Once the liquidation process has been completed, the business will no longer exist. Note that, unlike formal bankruptcy, liquidation does not have to occur all at once. Liquidation over time is another viable exit strategy for entrepreneurs.
Finally, there is bankruptcy. Fortunately, this is the one type of exit that requires no real plan because when filing for bankruptcy, all assets will be seized, and you’ll be relieved of your debts and duties.
However, remember that bankruptcy has severe consequences for your credit and may impact your ability to establish a newly registered company in the medium term.
Business exit strategies with Hilton Smythe
Your exit strategy maximises the cash value of your business/stake when you decide to leave for any reason. It realises the value of your business and can ensure the long-term success of the company you are leaving behind.
Planning for a swift exit however, is less than straightforward. At Hilton Smythe, our team can work with yours to scale back your role, plan for a transition and ensure you receive what you are worth.
Fill out our contact form below to speak to our team now.
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