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March 8, 2016

Why it’s important to think about your exit strategy

Your exit plan impacts how you run your whole business

Many business owners get so caught up in building their business that they don’t really consider where they want it to go in the longer-term. And yet your exit strategy is an essential part of any good business plan.

Your thoughts on your exit strategy need to be clear in your own mind because they have a bearing on how you operate as a business. For example, if you run a family business and would like to hand over the reins to your children one day, it’s important to think about how you train them in readiness for leadership. If your ultimate aim is to get listed on the stock market, you may want to follow certain accounting regulations at an early stage.

Deciding what you want from your business is one of the first steps in developing a long-term strategy. Why did you start in the business in the first place? Do you just want to be your own boss? Are you looking to make lots of money as quickly as possible and then retire to enjoy it? Do you want to have a lasting legacy for your children/grandchildren?
Putting a plan in place will ensure you remain focused on your business goals and that you work towards achieving them. Your exit plan will also be something that any potential investors will want to know. It can have a significant impact on your future financial situation.
An effective exit plan up your sleeve can also help you manage risk within your business. It can facilitate getting key members of staff more involved in the business to spread risk and ensure there is a contingency plan if anything was to happen to you. This ultimately creates a more sustainable business.

Exit strategy options

So, what are the business exit options available to you?
There are several ways you can exit from your business. Here are some of the more popular exit strategies for small business owners:

1. Sell up – You could sell your business to another company – perhaps to a competitor or a larger business looking to have a subsidiary in your industry. A trade sale can be a good way of getting the best price for your business. If another company sees your business as a good fit strategically, it may be willing to pay over the odds to acquire it. However, bear in mind that once you’ve sold the business, you’ll no longer be in control of what happens to it. The business model may be changed completely or the business might be merged into a larger company or even broken up and employees made redundant.
2. Management buy-out – This is an effective exit strategy if you don’t have family members to pass the business on to but would like the business to go to a known buyer(s) who understands it inside out and has the skills and knowledge to continue running it successfully. The key to a successful MBO is to not let personal relationships cloud your judgment. It can be difficult negotiating a price with people you know well, so it’s useful to get external advisors involved to value the business and draw up a fair agreement.
3. Family succession – According to the Institute for Family Business, there are over three million family businesses in the UK. The natural transition for many family businesses is simply to pass ownership on to the next generation. However, this is not without its difficulties. Your son or daughter may have very different ideas about how to run the business. Siblings may argue about who has control of the business. That’s why it’s advisable to seek expert advice for a more objective view. It is also vital to develop a formal succession plan to prevent disruption to the business and serious family disputes. You can read more family business advice here.
4. Liquidation – There is no obligation for your business to carry on. All good things come to an end and you might not find a buyer or you might prefer to wind the business up. In this scenario you do not have to distress yourself, just pay off your creditors try and sell you assets if you can, surrender your lease and stop trading. The net assets will then be yours to divide between yourself and any remaining shareholders.

The best exit strategy is the one that best fits your business and your personal goals. If money is most important, selling your business on the open market or to a competitor may be the best option. If you’d prefer to leave a legacy, family succession or a management buy-out may be the best way forward. Whichever exit strategy you choose, planning in advance gives you the time to get it right.