Exit Planning for Small Businesses
Ending your involvement with your business can be done effectively and profitably, provided you have the right exit plan in place.
This guide will show you how to:
- consider your aims for your business after you leave
- plan for selling your business
- use professionals to help with the sale of your business
- handle succession planning
Thinking in advance about how to end your involvement with your business can ensure you get the rewards you deserve.
What are your aims for your business after you leave?
Successful exit planning begins with careful consideration of what you want:
- are you going to sell your business as a going concern or for its location or assets?
- will your customer base willingly transfer to new ownership?
- will the sale proceeds form part, or all, of your pension fund?
- are there other partners to consider and consult?
You will also need to consider whether you want:
- to see the business continue to flourish after you have retired
- a complete break, or to say goodbye slowly by working part-time
- a relative or employee to take over the business. If so, how much will you charge them?
Plan for selling your business
If you decide to sell your business, you need to plan ahead.
When to sell
- Start to prepare the business for sale well in advance. Business sales can take a year or longer and the more prepared you are, the more likely you are to find the right buyer.
- If you are coming up to retirement, you could sell at any time over a number of years, so try to sell when the economy is in a healthy state to get the best price.
Assessing the value of your business and deciding on terms
You will probably do this with the help of a commercial valuer/business transfer agent. However, you need to consider:
- how much to charge for goodwill and stock
- how much the value of the business will be affected by your own departure
- what exactly you want to include in the sale
- whether to sell assets and shares if you run a limited company
- selling stock separately
- whether to accept payments by instalment: if so, how much and when?
Maintaining the value of your business before the sale
- Ensure that property and assets are well-maintained and serviced if you’re selling your business as a going concern. Buyers won’t want to have to replace essential equipment or replenish stock lines at once.
- Keep your customers loyal. Buyers expect to pay less if numbers of customers are declining or unlikely to stay after your departure.
- Maintain strong relationships with suppliers. Don’t let the business suffer through late deliveries and reduced quality. Suppliers may also know another customer who may be interested in buying your business.
- Keep key staff in the picture. Speculation can make staff less productive.
- Think about where you can make cutbacks either on costs or discretionary spending – but not on vital areas.
Using professionals in the sale of your business
You will need to get professional advice to:
- help you sell the business
- get a realistic valuation
- carry out the sale
- take care of contractual issues
In order to do this, you will probably need to use the services of an accountant, a solicitor and a business transfer agent / commercial valuer.
Accountants: an accountant can help you present the business figures for the sale, as well as minimise tax liabilities that arise from selling your organisation.
Any prospective buyer will want to carry out due diligence on your business prior to acquisition.
Preparing the most commonly required information – customer lists, supplier information, recent management accounts, analysis of the major balance sheet and profit and loss items – ahead of time will speed the process and also show the acquirer that the company is in good order. Difficulties in obtaining key information can make your company look disorganised and adversely impact perceptions of its value.
Solicitors: make sure you use a solicitor who is experienced in business sales, as these contracts can be complex.
Business transfer agents: a business transfer agent can:
- help you to find a buyer, using contacts from other parts of the country if necessary
- advertise in trade press in their name so you don’t alert other people to the fact that you are selling before you are ready
- screen you from unsuitable enquiries
- structure the deal in a way that appeals to all parties
- help prepare a memorandum of sale
A memorandum of sale summarises all the important aspects of the business, including its ownership, products and markets, assets and finances and reasons for sale. Some commercial valuers and transfer agents specialise in particular sectors, such as licensed premises, hotels, pharmacies and dental surgeries, so it’s worth finding out if there are specialists in your field.
If you have decided that you would like to see your business continue without you, you need to plan for the succession:
Set your objectives: there may be things that you want to see your business accomplish.
Produce a business plan for the future.
Think about your own role: you will need to set out as part of your plan exactly how you want to hand over. Do you want to:
- take on a part-time role?
- come in every so often to check how things are going?
- leave it completely to your successor?
You and your successor should agree your future involvement. Staff, suppliers and customers may value your continued role over the transition period. Indeed for some acquirers, the fact that you are prepared to remain involved in the short term will increase the value and/or reduce their perceived risk.
Agree the timing of your future involvement and when it will reduce.
Identify the right person as a successor: is there someone in the business you trust to take over? Think about taking a holiday and leave them in charge for a trial run. If you have someone in mind from outside the business you may want use a third party to approach them initially, without disclosing the name of your business.
For advice on how to find external successors www.businesslink.gov.uk will be able to advise you.
Establish a shared vision: consult people involved with the business, tell them your plans and let them know exactly what it will mean for them. You can then establish a shared vision of the future of the business.
Agree the finances: you and your successor need to be happy with what is agreed in terms of any future earnings you want to take from the business and the cost of any equity that forms part of the deal. Involve your accountant and make sure the business can stand any increase in overall salaries.
Keep the business running: work with your successor to maintain your output.
Plan the handover:
- set a timescale that is suitable for both parties
- set time aside to develop the succession plan
- train and mentor: identify what training needs your successor has and set out how and when these can be addressed
www.businesslink.gov.uk for advice on selling a business and succession planning.
This Exit Planning business advice article published in association with Lloyds TSB.
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