Exit Planning: A Guide for Business Owners15 Feb 2020
For some, retirement is the catalyst; for others, moving on to new ventures, or passing the business down the family line may be the reason. Whatever the reason, moving on from your current business takes planning to ensure the smoothest transition possible, as well as achieving the maximum value should your exit planning involve selling your business.
Options for exiting your business
There are several ways to exit a business, including:
Selling the business on the open market
Negotiating a management buy-out (MBO)
Passing the business down to a family member
Winding the business down
Selling your ownership stake (in whole or part) to investors or partners
Even if you aren't planning on exiting in the short term, it's prudent to have a clear vision of how you plan to achieve it and what your key objectives are.
Keeping it in the family
For some families, passing the business on to younger family members (usually children) is a time-honoured tradition. That said, it's important not to let this tradition sway you to the point that you pass it on to someone ill-equipped.
Passing a business down can become a complex and potentially contentious task, especially if you want to transition faster or slower than the new owner, or you wish to withdraw some value from the company as you go.
Even though you are keeping it in the family, it's important to consult with accountants, tax, and legal professionals to ensure the transition is smooth and that your best interests are protected.
Winding the business down
If your business has suffered irreparable losses and you have no family successors, winding the business down or opting for a members' voluntary liquidation (MVL) may be the best option. Depending on the circumstances, it may be wise to shut the business down and return any remaining capital to its shareholders before insolvency strikes.
Winding down a business can be a difficult time. Still, to prevent any unnecessary additional challenges, make sure that you consult with experts to ensure that all loose ends, such as taxes and employee rights, are all considered and addressed.
Agreeing to a management takeover
There are three ways in which a management team can take over a business;
A management buy-out (MBO): the existing management team buys the business
A management buy-in (MBI): a new external management team buys the business and takes over the management
A buy-in management buy-out (BIMBO): a combination of new and existing managers buy the business
Management take-overs are often the quickest and easiest way to exit a business, especially if some or all of the managers have first-hand knowledge and experience of the company. Of course, MBIs and BIMBOs are also valid options. Still, it's essential to consider whether the potential for conflict between the new and existing management team members could impact the business's success.
Preparing your business for sale
If your primary objective is to profit from your business upon exiting and invest in your retirement or a new business venture, selling your business may be the way to go.
Setting a timeframe
Deciding how quickly you want out of the business completely could make a big difference as to who you sell to; selling to family members or employees often involves payment plans that require you to stay somewhat involved in the business. If you're after a clean and speedy break, it may be better to consider marketing the business for sale on the open market. Depending on the nature of your business, however, even selling to an unknown party may not equal instant freedom for you, as some require you to stay involved during a transition period to ensure that the business continues to run smoothly without client losses.
Withdraw from any pivotal role
When it comes time to exit, some business owners are already largely superfluous to requirements regarding the day-to-day running of the business. Any that do play an integral daily role need to work at effectively making their position in the business effectively redundant in the lead-up to a sale.
No one wants to buy a company that can't survive without the current owner at the helm. Scale back your day-to-day involvement, delegate decisions you would usually make to other senior staff, and if possible, try to go in less often to force the business away from relying so heavily on you.
Getting your financials in order
Also, consult with your accountant regarding any tweaks that could improve profitability sooner rather than later; you want any profitability upswings to appear consistent as opposed to a sudden spike before selling.
Related: How to file company accounts
Systemise your business
Potential buyers want to see that your business runs like a well-oiled machine. So, work diligently through your operational systems and procedures and ensure that everything runs in accordance with clearly outlined and efficient protocols.
Create a 'how to' manual
Once you have your business running like clockwork, create a comprehensive 'how to' manual. This is a powerful way of demonstrating to potential buyers that the company can continue to run smoothly during and after transition, and that new owners need not feel overwhelmed by taking over. Additionally, create templates for repetitive tasks, create formal job descriptions, and anything else that can be systemised and recorded for utmost efficiency.
Maximise the valuation
The first port of call in maximising profitability is to consult with your accountant. From there, consider consulting with any other business experts or conduct an analysis yourself to determine how you could drive up your company's valuation. Consider all of the business strengths and how they could be maximised, and identify the weaknesses and address them, too.
Obtain a business valuation
It's a good idea to obtain an early business valuation as a guideline to work from. This can help to satisfy your curiosity and implement a plan based on realistic expectations. That said, it can also create the added motivation you need to improve profitability before marketing your business for sale.
You can reach out to us for a business valuation on 0207 043 4000 or firstname.lastname@example.org.
The benefits of business exit planning
Clearly defined business goals - exit planning is so much more than mitigating risk; it's about clearly defining the long-term goals of your business, giving you clear outcomes to aim for
Increased business value - as well as helping you to achieve the best possible sale price when it comes time to exit, having a robust plan in place can also help drive you towards maximising each opportunity that's presented along the way
Attractive to investors - having a robust exit plan and well-thought-out financial strategy for your business will be attractive to investors from the outset of your venture
Strategic thinking encouraged - carving out an ultimately preferred endpoint can greatly encourage strategic thinking along the way, guiding your business in the most profitable direction
The risks of inadequate exit planning
While, on the surface, it may seem that a defined exit strategy is only required in the lead-up to your planned exit, in business, it's imperative to prepare for the unexpected. Without proper exit planning, you risk:
Reduced business value
Struggling to find a buyer
Being underprepared for an intensive due diligence process
Having far less control over your preferred exit journey
Review your exit plan regularly
If you aren't planning on exiting in the near future, commit to reviewing your exit plan regularly (perhaps annually). Do your motivations still align with your current plan? Have any recent changes affected the value of your business or your personal financial circumstances post-exit? Does the current ideal buyer still fit the profile?
Plan, strategise, de-risk
If you have yet to formulate an exit strategy for your business, put it high on your list of priorities. Exit planning helps to inform strategic decision-making and provides a flexible template for success - after all, if you don't know what the end goal is, how will you know when you get there?
Are you looking to exit your business?
Our business experts help small business owners start, grow, plan for succession and sell their businesses for the maximum amount possible.
Give us a call if you’d like help at any stage of your entrepreneurial journey on 0207 043 4000 or email us at email@example.com.