Planning how you will leave your business when the time comes is crucial.
Even if it seems way off, coming up with a strategy in advance will allow you to create suitable conditions for your exit and prepare the company. It will also help you to identify the best time to leave and ensure you have fulfilled all your goals beforehand.
There is more than one way to step aside from a business. Sometimes, the circumstances might be out of your control. However, it is vital to have a preferred route to assist with your planning and ensure your company is ready for the next chapter.
We have listed the six most common exit strategies, including details on how they work and what you need to consider.
- Mergers and acquisitions
- Family succession
- Selling to a partner or stakeholder
- Management buy-outs
- Initial public offering
- Liquidation
Mergers and acquisitions
In the event of an acquisition, another company takes over your business. In a merger, two companies will combine to create a new entity. Both allow you to step away and let a new owner take charge.
Allowing a third party to buy your business is ideal, especially if you secure a favourable sale price that rewards you for your hard work and sets you up for the future. It also ensures your company will continue beyond your exit, though there may be significant changes.
It’s crucial to find the right buyer. Ideally, you want a match of cultures and values to allow for a smooth transition while protecting your staff.
If you pursue this exit, expect to work on your business to get it ready for the new ownership, which may include making the business leaner and identifying process as well as preparing your staff and stakeholders for upcoming changes. There may also be lengthy negotiation process until a deal is completed, so it is important to continue business as normal.
Family succession
It isn’t uncommon for business owners to want to pass the baton on to a family member, such as a child or other relative. Doing so keeps the company in the family, allowing a new generation to take the reins.
If you consider succession as part of your exit, there are things to contemplate. Firstly, you need to have a designated person who is willing to take over the business. Offering training and hands-on experience will prove crucial in preparing them for leadership while minimizing disruption to your company.
You also need to consider the succession process, starting with whether you are passing the business on or selling it. Adjustments to shareholdings may be required (which could be a source of tension if there are multiple family stakeholders).
It’s also worth considering the tax implications of the change, especially around inheritance tax and capital gains. Your accountant or financial advisor will be able to talk you through this.
Selling to a partner or stakeholder
If you run your business with partners, who are not yet ready to step down, it is possible to sell your shares to them. It allows you to remove yourself from the business with minimal disruption, leaving it with people who already have experience running it.
It is crucial to determine to who you are selling your shares. If there are multiple partners, you may need to distribute shares between them as governed by your shareholder agreement.
There is also the possibility of selling your stake to someone new, but you will need to agree on this with your other partners and find someone who is ideally a fit for the business.
Management buy-outs
A management buy-out (MBO) sees an existing management team purchase control of your business.
The benefits are that the team are already familiar with your company, allowing them to develop a clear vision for its future with an understanding of your processes and customers. As such, many owners prefer it over a third-party sale.
It requires you to have a team who are willing and capable of leading your business. You may need to provide guidance and training before your exit to prepare them, so it is essential to strategize an MBO well in advance.
Your management team will need to arrange finances for the MBO. If you want a high price for the sale, this will be a challenge for the team, though there are external options that help, such as private equity.
Initial public offering
An initial public offering (IPO) is where you take your business to the public and sell shares on the stock market. It transfers ownership from private ownership to public and allows you to raise substantial funds.
However, you need to offer sales and profit growth for investors to want to invest. There are also costs associated with regulation and scrutiny from having a company in the public sphere, which could deter people further.
If you choose this exit option, spend time familiarising yourself with the requirements and conducting due diligence, which can be intense. You will also need to consider leadership issues for your company when it is floated.
Liquidation
If you don’t want to or can’t pass your company on to someone else, another option open to you is to look at liquidation. This is where you settle any liabilities and sell your assets, ready for the business to close as you exit.
Liquidation isn’t the most lucrative of exit strategies, as the primary income you receive will be from the sale of assets. It also means any employees or stakeholders you work with will need to find new opportunities elsewhere.
However, it offers a decisive finish and is often more straightforward process than some other options. It’s suitable if you don’t believe your business has much growth potential to attract new owners.
Your plan should account for the various tasks you must do before liquidating, including filing paperwork and informing customers and contractors of your closure.
In summary
There are numerous paths for a business exit. Your chosen one will depend on who is available to take over and what you want to achieve from the end of your tenure.
Being aware of the options is vital to determine which is most suitable. Once you have made your choice, it is critical to draft an exit plan that outlines your decision, the process and what you need to do to prepare.
This plan will also make it easier to adapt your company for life after your ownership, resulting in a long-lasting legacy and reducing disruption during the transition period.
If you are considering your exit strategy, a Pegasus advisor will discuss the options available and help you pinpoint the correct route. They will work with you to maximize your company value before a sale or prepare a new team to take over.