Exit planning is one of the biggest challenges a business owner is likely to face. It may well be difficult to think about disposing of the business you have nurtured and grown over many years. However, it could be one of the most important decisions you ever make.
It is never too early to start exit planning and the longer you spend on it, the smoother the transition process. Good exit planning takes time. In my experience, business owners will always plan carefully and thoroughly when starting a business or taking one over but they don’t all plan for their exit.
What should I include in an exit plan?
Perhaps one reason why many business owners do not address exit planning is that they are focused on the day-to-day running of the business. That is why it is crucial to take some time out of your business to start the planning process and take advice.
To start formulating an exit plan, you should consider:
These are just a few of the points you will need to address. Your exit plan will be driven by your individual circumstances, including your age, health, personal objectives and business plan.
Complementing your business plan
An exit plan should sit alongside your strategic plan in order to give you the best chance of retaining the business’ value. Taking a critical view of where the business is now and considering the risks for the future is a good starting point. In particular, consider the following:
The time-honoured SWOT analysis is a good tool for taking that critical view. This involves identifying the strengths, weaknesses, opportunities and threats to your business.
You can then consider any changes you need to make in the business to address any issues you have identified.
Approaching a business exit
A question from many business owners approaching the exit stage is: How much is my business worth? The short answer is, what some is willing to pay for it.
To assess the value of your business, you could commission a desktop valuation. This is by no means an exact precise science but it can highlight the likely valuation range. You can then assess how this fits with your future income needs
As you approach the exit stage, you will need to understand the options available. There are a number of potential ways to exit a business. Some of the most common for owner managed businesses are as follows:
1. Family succession
Many business owners choose to gift or sell shares to family members. However, do not fall into the trap of assuming that family want to take on the business. Consider whether they have the right skills or experience before discussing it with them.
It is vital to have that difficult conversation sooner rather than later. With family businesses, exit planning can be especially complicated because of the relationships, family dynamics and emotions involved.
Many people feel uncomfortable discussing topics such as ageing, retirement, and financial affairs. That is why it can be very helpful to engage a third-party facilitator, such as your accountant or financial advisor, to lead these discussions. This can help to keep matters on a business level and ensure everyone buys into the plan.
2. Company purchase of own shares
In a company purchase, your company buys back shares from outgoing shareholder leaving remaining shareholder/s with 100% of the business ownership. This can be a straightforward transaction with no outside parties involved, which means no protracted negotiations or due diligence.
3. Management buyout
A management buyout (MBO), which involves selling the business to one or more members of your existing management team, may be a good option for you. Your buyers would need to set up a new company to purchase the shares and raise the funds. Because you will not need to market the business to potential buyers, this can make for a smoother transaction.
In addition, because your MBO team knows the business, this can make the due diligence process much quicker and easier. It also means fewer warranties, less disruption to the business and an easier transition for customers and employees.
4. Employee buyout
An alternative to an MBO is a sale to a group of employees. There has been a rise in sales being structured as selling shares to an employee share ownership trust (ESOT). This has some key advantages:
5. Trade sale
A trade sale involves confidentially marketing the business to attract a third party buyer. By creating a market and competition, the objective is to maximise the price and terms of the deal for the vendors. Trade sales can take between 12 and 18 months to complete from first going to market. In some instances, buyers may make a direct approach or the marketing may be restricted to a few identified strategic buyers.
6. Sale to private equity
Private equity houses have funds to invest in growing companies. Selling to a private equity investor could provide you with an exit and the business with access to new growth funds, expertise and contacts. It could also be a good option if you are looking to remain involved with the business after a sale.
Securing private equity can be time consuming and exhausting as it involves a high level of due diligence. Be prepared for the investor to pull the business apart before agreeing to a deal.
7. Close down and liquidate
For some business owners, a controlled wind down of the business is the best option. This means selling any assets, such as property, equipment and stock and paying all liabilities, including staff redundancies. This would be a last resort for any profitable company.
Because there are a number of options available, early planning is the key. The initial stages of the exit planning process should help determine the most relevant and potentially successful options available to you.
You will need to get advice on the tax implications of the various choices you are reviewing. Although tax should not drive your commercial decisions, planning tax efficiently will maximise your outcome when you dispose of your business.
Alison Watts will be joined by Thomas Westcott Partners Patrick Tigwell and Ian Pring and Giles Dunning, Head of Corporate at Stephens Scown for a webinar: Exit strategies for business owners. Sign up now for this FREE event on Thursday 13 May.
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