Planning Your Business Exit: What You Need to Know
All that hard work growing your business shouldn’t go to waste. Learn how to plan a successful exit here...
Aside from starting up, how you handle your exit is possibly the most important and tricky stage of your life as a business owner.
Too many owners spend years carefully growing their business – only to mess up their exit plan and see their hard work go to waste.
This article is intended as an introduction to exits for business owners, and should be a helpful starting point when putting together an exit plan.
We cover how to plan for an exit and set your objectives and the different ways you can actually exit a business. You will then learn how to perform specific types of exit, namely trade sales, management buy-outs and handing over the reins to a family member.
How should I plan for an exit?
Start early. When you started your business, it’s likely you had an eventual exit in mind, and you may have even come up with a timeframe for doing so. At the very least, you should plan for an exit a few years in advance – this allows you to direct your business towards an exit by getting it in the best shape possible.
Consider your aims as a shareholder, a business owner and as a manager as these may be quite different.
Consider the objective value of your business. Why would someone want to take the business off your hands? If you can’t think of some clear reasons, then neither will potential buyers.
What are my objectives as a shareholder?
As a shareholder, you might have one of the following objectives in mind:
Financial stability. Your main objective could just be to exit with enough money for retirement or have a decent nest-egg for a rainy day. In this case, you would be willing to accept slightly less when selling the business in order for the sale to go through.
Maximum price. Your goal could be to maximise your return on investment, at the expense of the exit falling through.
Pass the business on to a preferred management team or family member. MBOs and family succession planning can come with issues quite separate to selling a business.
What are my objectives as a business?
When planning your exit, you might have your wider business development goals in mind, which a sale or exit could help meet. Particular business objectives that an exit could help include:
Raising growth capital. An exit could raise an important lump sum to take your business to the next stage. It could fund new hires, back product development or allow your business to enter a new market.
Gaining an advantage over competitors. If you are acquired by a customer or supplier, you could reap the rewards of streamlining the supply chain.
Creating an economy of scale. Especially if you are acquired by a larger competitor, you could substantially reduce your costs and reap the rewards of the better deals and more favourable contracts they have.
Retaining key employees. If your exit results in better job security or prospects for key people, they will be incentivised to stay.
What are my objectives as a manager?
As a manager, your objective when exiting a business could be either ending your involvement or carrying on.
Ending your own involvement is easier in some exit routes than others; a straightforward business sale provides the biggest chance of a clean break, whilst an MBO is more likely to require you to stay on in some capacity.
However, perhaps you run a consultancy-type business in which your own skills and experience play a crucial role, or perhaps you just want to continue working for the firm because you enjoy it. Whatever the reason, ensure you are comfortable with the concept of someone else owning and deciding the overall direction of the business – sell it, and you become a mere employee.
How do I prepare my business for an exit?
You should start getting your business into shape well in advance of your exit.
In particular, you should:
Grow profits every year.To cut down on corporation tax obligations, many businesses reduce their year-end profits by, for example, bringing forward important spending. Whilst this can be a smart tactic, you should focus on producing a healthy set of figures in the years leading up to an exit.
Get your book-keeping systems and accounts in order. If you sell a business, it will have to go through a thorough due diligence process. If you put the groundwork in place, this will make the process much quicker and vastly increase the chances of a successful sale.
Reduce the risk your business faces. Cut down on uncertainty by incentivising key employees to stay with the business through share schemes, tying down suppliers and customers to long-term contracts, protecting your intellectual property rights, buying premises or agreeing long-term office leases or taking steps to maximise capital gains tax relief.
The entrepreneur’s relief scheme gives you a reduced rate of CGT on the sale of a business, up to a maximum lifetime allowance of £10m. Take advantage of this by re-investing spare cash to grow the business, rather than in savings or investments.
What are some possible exit routes?
Sell the business. Read our article on selling a business for a more in-depth view on what this involves.
Hand the reins to a family member
Set up a management buy-out (MBO)
Set up a management buy-in (MBI). This is one of the most difficult exits to pull off. MBIs involve an external management team taking control of the business after raising the necessary finance. Various specialist consultants exist to try and help you achieve an MBI.
Float on the stock market. This is only a partial exit strategy, as you generally have to retain some stake in your business in order to go public. Read our guide to floating your company here.
Merge with another company. It can be difficult to plan for a merger, unless you have a specific company in mind that would complement your strengths as a business.
Liquidate the company. If all else fails, you could simply sell your assets, cease trading and shut down the business.
How should I plan to sell my business?
In the vast majority of cases, a straight trade sale of a business is the way to go if you want to achieve the best value when exiting. To prepare for a sale, take the following steps:
Seek professional advice. You may wish to avail of a corporate finance adviser, non-executive director, corporate lawyer, accountant or business valuation expert.
Groom your business. Create a healthy set of finances, cut down on risk, tidy up your premises and equipment and improve management information systems to present your business in the best light to possible buyers.
Find and approach buyers. Potential buyers might be direct competitors, major suppliers or customers, or VC firms. It is normal practice to sound out potential buyers anonymously through your corporate finance adviser.
Negotiate and complete the process. Play off buyers against each other to get the best deal, and be prepared to undergo an onerous due diligence process once you’ve accepted an offer.
The above is only a very brief overview – for a more complete guide, read our article on selling a business here.
How should I plan for a management buy-out?
Follow these steps:
Raise the possibility with your management team. Make sure you don’t make any promises at this stage – just try and gauge the level of interest.
Give your team the necessary training in running a business. Any VCs or banks backing an MBO will want to be satisfied that the team has the skills necessary to take over.
Value the business. For a guide on how to do this, click here.
Allow management to raise the money. They will have to approach VCs and banks for funding, unless they already have the funds ready to go.
Agree a deal. The deal might be structured in various ways – they could acquire it over a number of years using their share of the profits or all at once. Get them to legally commit to buying the whole business in a signed contract so they won’t be able to change their minds.
How should I plan for a family succession?
Handing over the reins to a family member is a sound idea in principle, but in practice, blurring the line between business and family can raise a whole host of issues. Take these steps:
Involve a neutral third party. A third party such as a non-executive director can provide an objective view of the process and ensure your feelings towards your family don’t get mixed up in your exit plan for the business.
Identify and train a successor. Make sure the family member has enough knowledge and skills to seamlessly take over the running of the business. They should be intimately involved in management for some years leading up to the eventual handover, or you could give them management experience elsewhere.
Discuss your vision for the business with your successor. Your chosen successor might have very different ideas to you as to where to take the business. Ensure you are on the same page before handing over the reins.
Consider the tax implications. Handing over the business to family can see you benefit from various tax schemes – talk to your accountant.
Have a plan B. You might have a grand vision of handing over the reins to your son or daughter, but ensure you have a backup exit plan if they are not interested.