Is Planning Your Exit as Important as Planning for Business Growth?

From keeping your funders happy to providing you with a back-up plan, we look at seven reasons why having an exit strategy is essential...

Is Planning Your Exit as Important as Planning for Business Growth?

Entrepreneurs’ ability to delegate tasks allows them to save time and achieve more. But rarely do they give thought to the ultimate “delegation” – having somebody else own and run their business.

A sound succession plan is vital and comes into its own not just in cases of death, disability and divorce of the owner. However, to be of maximum value, it needs to be in place as early as possible.

Here’s why having an effective exit plan is necessary for your small business…

It reassures investors and lenders

A business plan that includes an exit strategy demonstrates forethought. Bear in mind that investors don’t get their money till there’s an exit event (IPO/merger, etc.). The fact that you’re planning for an eventual exit can make the difference as to whether you get the required capital.

Unlike investors, lenders do have fixed timescales for their “loans”. However, planning for an exit is reassuring to lenders as well because it suggests you’re putting in place the people and systems to run the business in the unlikely event something happens to you.

Planning for exit means you have a plan B

While you may not be building the company to sell it, there comes a point in an entrepreneur’s life when the job has changed significantly. They may find themselves office bound and dealing with hiring and firing, or legal matters rather than what they enjoy doing.

Should you decide at some point that the business does not excite you anymore, it becomes much easier to sell if you had built into the very fabric of the enterprise growth those exit qualities that make a business attractive to buyers.

Having an exit plan could mean more tax benefits

We all move on eventually, and our families (or the employees/outsiders) end up taking over the business. Planning for it from the start would position for a minimum tax liability on transfer – whether Capital Gains Tax (CGT), Inheritance Tax (IHT) or Entrepreneur’s Relief (ER).

You’ll be prepared for a dispute

While a good contract provides a guide for the resolution of most disputes between partners/shareholders, exit planning provides a sound basis for the valuation of the company should it become necessary. It will also help that all the records – accounting, legal and operational – exist in the right format.

Even sole-traders benefit from having the business valuation-ready as it puts the owner in an advantageous position in some court actions and HMRC disputes.

Easier due diligence

Due diligence is the investigative work an acquirer puts in to make sure there are no skeletons in the cupboard. Due diligence can take a while and many deals either collapse at this stage or require substantial renegotiation and a significant reduction in price.

The longer a target company has spent “preparing for an exit” the easier and quicker due diligence will be and the lower the chances of scaring the buyer into pulling out or demanding concessions.

It will help you sell the business if the time comes

One of the first questions prospective buyers ask is why the seller is selling their business. And they never believe the answer they get, however truthful it may be. Their suspicion is always that there’s another, more sinister, reason lurking in the shadows. They spend much time trying to hunt this real reason down.

However, if you can demonstrate clearly and irrefutably that right from the start it was your plan to sell at a particular point in the business’ growth; you’ve got a convincing reason that the buyer does not need to look beyond.

This article was written by Clinton Lee, who works with business owners to help them to extract value from their firm.

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