Business Exit Strategy – Choosing The Right One

No matter how well your company is doing, it’s always worth having a business exit strategy in place. Whether it be a long-term strategy that ensures you can eventually extract the most value possible from your company, or a contingency plan in case things don’t go to script, a business exit strategy should be something you give thought to.

Of course, the business exit strategy you choose will be highly dependent on either the opportunities or dangers your company faces at the time. By having a rough idea of what route you would take in any given situation though, you can ensure that your business is agile enough to capitalise on changes in your industry.

 

 

What is exit strategy in business?

Put simply, a business exit strategy is a plan that allows the owner to either sell or exit the company in a way that ensures the best possible outcome for them. This could be a business sale for a profitable company, or a closure for one that’s struggling.

 

Should a business plan have an exit strategy?

While not essential for plans given to investors and financiers, it’s a great idea to include a business exit strategy in your business plan for yourself to refer to. This ensures that if you ever encounter any difficulties, you already have an option in place to follow to avoid worsening the situation. Equally, you may have an end goal of crystallising the company’s value and exiting with a large lump sum.

Having a business exit strategy in place can not only provide some security in turbulent trading landscapes, but can also provide a roadmap for those hoping to maximise the amount they can eventually sell their companies for.

 

 

What are the benefits of having a business exit strategy?

Allows you to keep to plan

When business owners are knee-deep in the day-to-day running of their companies, attention inevitably wanders to smaller concerns such as staff absences, supply delays and other issues. Because of this, it can be difficult to remind yourself of the company’s long-term goals. By having a business exit strategy in place though, you can see exactly what you’re working towards.

Value provides another metric to work with

By having a current valuation of your business, you can track its progress in relation to the market. This can be a useful metric to keep an eye on if you are hoping to sell eventually. Equally, a declining valuation may suggest cause for concern within the business.

 

What are the three main exit strategies?

There are several business exit strategies that companies can use, but the three most commonly seen are the selling of the company, passing it on to a relative, or closure.

 

Selling the business:

One of the best things about owning a business is that it eventually becomes an asset itself, which you can sell to interested parties for the right price.

There are a few different options when it comes to whom you can sell to.

You may decide to sell to a private investor (Private Equity Investment), a competitor, or another third-party that wants to take over the day-to-day running of your company (Trade Sale). In these types of sales you may be expected to stay in the business in some capacity to help the new owners settle in.

If you only own a part-stake in the business, you may be able to sell your share to the other partners in the company. You may also be able to sell the business to the existing management team (Management Buy Out) or even to the employees which can be a tax efficient option that can also motivate and retain them (Employee Stock Ownership Plan).

Selling to somebody else in the business can make some sales processes more straightforward. It’s likely that someone already familiar with the company can keep it running with the minimum of fuss after your departure.

The only downside is that by selling to somebody closer to you, you’re less likely to drive a hard bargain, receiving less money than you might have otherwise got elsewhere.

 

Passing the business on to a successor:

When business owners approach retirement, they often look within their own families to find their successors. This can make sense to those who like the idea of still being able to have some sort of connection and input after exiting.

Transferring a company over to a family member also allows you to effectively groom a suitable relative over the course of years to ensure that they’re ready to jump straight into your shoes when needed. Of course, business owners often either accept less than they could otherwise get, or receive no payment at all when they pass their business to a relative. This makes it a poor choice for those looking to maximise the value they’ve built up in the company.

Occasionally, businesses are passed on to family members who either lack the competence to make the company work, or lack the interest of being owner in the first place. Make sure that if you’re considering this as an exit option, that you check in periodically with the relative you plan to transfer the business over to. You need to know that they’re both enthusiastic and competent enough to keep the company running well.

 

Closing the business:

Not every business venture is successful, and it’s important that you know what to do if your company eventually loses its viability.

Familiarise yourself with the signs that your business may be struggling and be prepared to exit before issues have a chance to snowball. If sales are slowing, your cash flow reserves are difficult to manage, or clients are leaving, it may be worth looking into how a liquidation might help you to get out with the minimum of fuss.

 

Other business exit strategies

Outside of the three main exit strategies, there are several others that you may choose to employ.

 

Going public:

This is usually the preserve of business owners’ dreams, but should your company actually reach the heights that a public buyout becomes an option, it can be a very lucrative route to take.

Not all stock flotations achieve success though. If, for whatever reason, your stock doesn’t attract investors as much as first hoped, you can find that your business is instantly devalued by the process.

 

Merging with another business:

In the event of a merger, you may decide that you’re content to take a back seat and allow the other company’s owners to take control. This is usually only an option after they’ve been given time to become acquainted with your company’s operations and how to effectively run it.

 

Insolvency proceedings:

If your business cannot pay its debts and doesn’t have any assets to sell off to cover them, you may find that winding up proceedings are brought against your company. Instead of being an exit strategy, this would effectively force you to exit instead.

 

 

Consideration factors

When choosing an exit strategy, it is important to consider a number of factors, including:

• The value of your business: 
  The value of your business will affect the amount of money you will receive from the sale.
• Your personal goals:
  What are your goals for the exit? Do you want to maximise your profits, maintain control of the business, or help a family member or employee?
• The tax implications: 
  The way you sell your business can have a significant impact on your tax liability.
• The timing of the exit: 
  When do you want to exit the business?

It is also important to get professional advice from an accountant, lawyer, or financial advisor when choosing an exit strategy. They can help you understand the tax implications of your exit and make sure that you are protected legally.

The best exit strategy for you will depend on your individual circumstances and goals. If you are looking to maximise your profits, then selling your business may be the best option.

If you are looking to maintain control of the business, then passing it on to a successor may be the best option. And if you are looking to exit the business quickly, then liquidation or dissolution may be the best option.

It is important to carefully consider all of your options before choosing an exit strategy. By doing so, you can ensure that you choose the best option for you and your business.

 

Looking to exit your business soon?

We provide several different solutions for owners looking to exit their businesses. Whether you’re looking for a buyer for your company, or just hoping to make it more attractive to investors, we can help.

Find out more about our Business Exit Planning Service →