There are many factors involved when it comes to leaving a business. It’s crucial to plan your exit well in advance to ensure you’re meeting all the necessary criteria.
By considering your exit ahead of time, you will create a strategy that enables you to leave under the best possible conditions. Doing so elongates the legacy of your business, maximises value, protects your staff and customers and minimises disruption.
This guide explores nine things you must consider during the exit planning process to tick all the boxes and carve out a smooth route for leaving your company.
The structure of your business
Different business structures have varying implications for the owners’ exit. It’s critical to understand any restrictions yours poses.
It is relatively easy to close your business if you are a sole trader as long as you’ve paid off any outstanding debts or liabilities.
However, if you want to sell the business to someone else, a limited company will be more appealing. This is due to the company being a separate legal entity, which offers some protection to the director.
If your business is a partnership, there may be implications, especially if your partners are not exiting the business with you. In most cases, this is taken care of in your partnership agreement, but ultimately you will need to involve them in the planning process and agree on a route that suits all parties and ties up any loose ends.
The type of exit
There are many ways to leave a business. Common examples include:
- Family succession, where you pass on the company to a family member
- A third-party sale to a new owner
- Management buy-out to an existing leadership team within the company
- Merger or acquisition, where another company takes over your business
- Liquidation, where all assets are sold and the business closed
- An Initial Public Offering (IPO), where you sell your business to the public in exchange for shares, although this is only a partial sale option.
You may have a preference on which route you want to take, or the external context might force your hands. Regardless, it’s good to understand the various options and decide which you want to pursue. This will allow you to recognise the implications and address them in your planning.
It also helps you to prepare the company for your exit, with better knowledge of who is likely to take over (if anyone) and under what circumstances.
Timeframes
It is recommended that you plan your exit at least 2 or 3 years in advance – it’s even worth contemplating when you first start your business.
Many factors sway a business exit, many of which are impossible to predict, such as changing lifestyles or health. Some are easier to pinpoint, such as retirement or moving on to another entrepreneurial idea. Your timeframes will need to be flexible to accommodate this.
However, having a rough estimate of an exit date is helpful. It allows you to prioritise actions ahead of the exit so you walk away having achieved everything you need. It will also give you a schedule to stick to when preparing the business for your withdrawal.
The target buyer
If you choose to sell your business, a critical consideration is who you want to sell it to.
If you are taking the succession or management buy-out route, it is most likely that the candidate(s) is known to you and you are priming them to take over. If not, you will need to place your business on the market and wait for a suitable buyer.
Understanding what you are looking for in a buyer allows you to find the right person. List the criteria that are a necessity for any potential buyer and your ‘would like to haves’. This will refine your search to those you know have the skill needed to take over your business and leave it with the confidence that it’s in safe hands.
In some cases, knowing what you want in a buyer can uncover opportunities even before you are actively considering an exit, such as if you receive an offer from a buyer that is too good to refuse.
Company shareholders
As a business owner, you have a duty to act in the interest of any shareholders. In many cases, shareholders will have voting rights and other entitlements that allow them to influence company decisions, including your exit strategy.
The opinion of shareholders can complicate leaving a business. They are likely to have a say on who takes over, and you will need their sign-off before any decisions are made.
Endeavour to communicate with your shareholders regularly to manage expectations and highlight any issues in advance. If any serious problems emerge, you may need to reconsider your plans in order to appease shareholders.
Company agreements
Some companies have set agreements with partners, such as landlords and other stakeholders. In some cases, these agreements can dictate what you can and cannot do ahead of exit or affect the timescales (such as if a contract has to last a certain amount of time).
There may also be articles of association or regulations which outline how your business can operate. It is crucial to understand these to ensure you do not violate any agreements and design a strategy that avoids any obstacles.
Employee, customer and supplier contracts
Another significant consideration when exit planning is customer, supplier and employee contracts.
Most contracts will have set stipulations. Examples include giving notice of any changes or having to fulfil specific criteria before a contract can be ended.
It is important to understand how a change of control of your business may affect the contracts you have in place. This is critical as it could affect the value of the business to its detriment.
If you are closing the business or need to cease contracts before your exit, make sure you do so appropriately, giving your customers, suppliers or employees the required notice. If you have contracts with an end date anyway, you might choose to exit after these have ended or not renew them to make the process easier.
Accounts
Any potential buyer who considers your business will want to understand its finances. A company with clear and consistent accounts will be much more appealing.
Before your exit, it is crucial to create a stable accounting structure that allows you to stay on top of your finances and showcase your strengths to buyers. Aim to do this from day one, as it will make running the business easier.
If you aren’t already in a good position, you must have your accounts in order before you consider placing your company for sale or risk deterring buyers.
Even if you aren’t planning to sell the business, working towards a situation where you have minimal liabilities and plenty of cash in the business will always enhance its future value.
Appointing legal, financial and other support
As this guide suggests, there are numerous considerations you must make when planning a business exit. You need to implement a strategy that accounts for them all, including ensuring you do not breach any contracts and having your accounts in order.
It is wise to consult corporate finance, legal and financial support early in the process to build an efficient exit plan. They will help you get your company into shape to maximise value and allow for a smoother process.
Working with a corporate advisor will assist on a more general level, allowing you to understand the implications of your exit and choose a route that works best for your needs.
Gaining these contacts early on will also prove helpful once the exit comes. You will need advisory, legal and financial support during the sale process, especially as you will need to negotiate with potential buyers.
Conclusion
Even when it seems way off in the future, planning your business exit requires time and preparation. There is a lot to consider, especially if you want to leave in a manner that suits your needs, your business and your stakeholders (including suppliers, shareholders, staff and partners).
Understanding the factors that could affect your exit is crucial to an effective strategy. It allows you to prioritise actions, inform the necessary parties and find an appropriate exit route based on your requirements. Most crucially, it can make a potentially complicated process much more straightforward.
If you are contemplating your business exit plan, Pegasus is here to help. We work with you to create a robust exit plan that suits your goals and leaves your business in a strong position – including identifying the best buyer to take it forward.