Most entrepreneurs will come to a point where they eventually want to sell their business. It may stem from a myriad of reasons: lifestyle changes, retirement, wanting to bring in new leadership or being ready for a new challenge elsewhere.
Whatever your reason for stepping aside, you will want to maximise value to get a fair deal for your company from the right kind of buyer.
Planning your exit strategy ahead of time is crucial. It lets you plot out what to do before you leave your small business so that it’s in the best possible position.
We explain what to include in your exit plan to cover all bases.
Why is exit planning needed?
Exit planning is crucial in understanding what you want to achieve before stepping aside from your business.
Small business owners will spend a great deal of time and energy in their ventures during the early stages and ongoing operation. Naturally, you do not want to threaten your hard work or cause disruption when leaving.
Most owners will want to leave positively – which includes getting a fair and reasonable sale price, finding owners who can guide the future of the business and ensuring as smooth a transition period as possible.
This doesn’t just happen. You need to have a plan that ticks off the appropriate boxes to maximise value, find a suitable buyer, prepare your employees for change and protect the brand legacy.
Exit planning helps pin down the steps you will take to do this, including the timeframe you expect to leave and the process to follow. This allows the change to happen smoothly, with no unturned stone, and highlight what should be done and when.
It’s also vital that exit planning happens in advance. When you start a business, you should always have an end in mind. By doing it early, you will approach it with a neutral mind rather than being caught up in the emotion when the time comes.
What to include in your exit plan
You should include 8 key elements in your exit plan, each of which impacts the way you want to leave your business. We’ve listed them below.
The buyer you want
One of the most prominent concerns when stepping aside from a small business is who will take over. The chances are you won’t want to hand the reins to just anyone. You need someone who will effectively guide the company while maintaining the core values and working well with your staff. But ultimately it is no longer in your gift when you leave the company.
Another crucial consideration is finding someone who will give you a fair.
Start by listing the criteria you wish a new owner to have and who would be the most suitable custodian of your business. This could be a competitor, a complimentary business or trade buyer.
Refine the most important characteristics you want the buyer to fulfil and document these. When it’s time to move on, this will help you cross-check any potential buyers and ensure they are a good fit.
What you want to achieve
Every entrepreneur will have a vision for the company that they want to reach. While the focus will be maximising business performance, it often feeds into their personal goals and what they want to accomplish.
Before you leave, you will have set objectives you want to fulfil. List these in advance as part of your exit strategy to give you a goal to work towards. It will also prevents any regrets if you leave the company before you’re ready.
Outlining these targets also helps you to determine when to move on.
How to maximise value
When selling your business, you want to maximise the price that reflects the hard work you put into it.
There are many ways you can take to maximise value. Examples include acquiring other companies, improving market share, scaling operations, building brand reputation, targeting new locations or retaining talent in the workforce. It also includes enhancing your growth prospects.
However, one of the keys is having a management team in place with the skills and resources you believe are needed to run your business or help it reach the next level as the business cannot revolve just around you.
These will make your business more attractive to prospective buyers, which will in turn improve the price you will receive.
The timeframe
Another integral part of your exit planning is when you expect to leave. Of course, this can be hard to determine, especially if it seems distant. However, having a rough idea of the timeframe can make your strategy more tangible.
Too few owners plan their exit and as a result do not maximise their return – deciding one day to sell your business may not be the optimum time for you or your business to maximise its value. Timing is key as is planning for it.
The business valuation
Before you sell any business, you must understand its potential value and what the levers you can use to maximise it. Typically, you will get an independent third party to conduct a valuation. This valuation is then used to determine the price you should seek from a buyer.
The price you obtain will depend on the value to the buyer and differ between a strategic, trade, MBI or MBO buyer.
It is important to understand the mechanisms that determine price now, so when you are ready to sell you have ensured that these are maximised.
Working with a corporate finance advisor will help you to determine this valuation before you put it on the market.
Analysis of exit strategies
There is more than one way to exit a business. When planning how you will leave, you need to consider which makes the most sense.
Common exit strategies include:
- Family succession, which sees relatives take charge. This is commonly used for family businesses but only works if you have a fitting successor with the desire and skills to run the company.
- Management buy-out (MBO) where your existing management team take ownership, typically from a parent company. Again, it only works if you have the appropriate people willing to take over.
- Third-party sale to a new, external owner e.g. trade buyers or private equity. You place your business on the market until you find a buyer willing to offer an acceptable price.
- Liquidation, where you close your business and take out the remaining monies. It is typically used to repay investors (and yourself) without selling the business.
Each strategy has pros and cons that you must contemplate before choosing the ideal route. You should include an analysis of the various methods to see where your preferences lie.
Determining your choice early will also enable you to create suitable conditions. Then, when it is time to exit, you can ensure it is still the best option for you.
Suggestions to minimise the financial effects
Exiting a company has financial ramifications. You will want to minimise these as much as possible to make the process appealing to any buyer and avoid disruption to your business as you leave.
Examples of taxes include:
- Capital gains tax
- Estate taxes
- Corporation tax
Fortunately, reliefs are available to reduce these taxes, including Business Asset Disposal Relief, Entrepreneurs’ Relief and Rollover Relief. Obtaining tax advice to find out what reliefs you may have access early in the process allows you to take the appropriate measures.
Your action plan
Once you have considered your exit strategy, it’s time to make an action plan. There will typically be several actions you need to complete. Understanding these ahead of time will enable you to check everything off.
Your aim should be to tie up all the loose ends and make the transition process easier for the business. Examples include communicating your exit with suppliers, staff, customers and stakeholders, finalising your accounts and managing shareholder relationships.
Document your action plan to create a checklist to follow. This will guide the exit process whenever that time comes and make it easier to think ahead.
Conclusion
Exit planning is crucial, even when it seems far away. There are many things to consider and doing it early allows you to approach it with a clear mind.
By creating a careful plan, you focus on maximising value, finding an appropriate exit route and ensuring everything is addressed. This means you leave on a positive note that protects your staff, stakeholders, legacy and personal interests.
We will help guide your exit strategy with full consideration of the goals you want to achieve. Get in touch today to speak to an expert.