When setting up a small business, often the last thing that is on your mind is selling your business or planning for exiting the business. However, having a business exit strategy in place for when the time comes is beneficial.
The more you plan ahead for the future, the greater control you will have over how you exit your business and when. It will also give you a realistic idea of the value of your business and ways you could increase the value of the business.
What is a business exit strategy?
An exit strategy is a business owners plan for leaving the business. Having an exit strategy in place enables you to prepare for unexpected scenarios.
Exits are not always selling the business. Below we outline the different types of exit strategy you could choose to adopt.
What type of exit strategy is right for my business?
The type of exit strategy you chose to adopt will depend on the type of company you own and your individual goals. Below are common types of exit strategies that you may want to consider.
- Sell to a Partner or Investor
- Family succession
- Management buyout
Acquisition is often referred to as ‘merger and acquisition’. This is when your company is purchased by or merges with a company with similar goals to your business.
Often companies buy their competitors and merge their product and service offerings into one larger company. For example, a coffee shop could buy a bakery and incorporate their products onto their own menu.
An acquisition and merger can work for businesses of all sizes, including start-ups.
Merging with another company may give a competitive edge or a strong existing customer base. Some companies choose to merge to eliminate competition.
This exit strategy does allow you room to negotiate on the price and terms of the sale. If you choose acquisition as your exit strategy, you can work on making your company appear attractive to your competitors. However, you should be aware that your competitors may not be interested in merging and therefore you would need another exit strategy option in case your business does not sell. It should also be noted that the acquisition strategy can be a very long process.
A common exit strategy for small businesses is to liquidate your company which means closing your business and selling all of the business assets.
If you choose to liquidate, you will need to use the proceeds to pay off any outstanding debts and payout any shareholders. You should also consider how this option will affect your employees and customers as it could damage your relationships with them if not dealt with in an appropriate manner.
This is one of the most simple and quickest business exit strategy however you are unlikely to get the biggest return on your investment. To make money you will need to have valuable assets to sell such as land and equipment.
Liquidation may be the only option if your business relies on one individual to run it or where family members are not interested in taking over the business.
Sell your part of the business to a business partner or investor
If you are not the sole proprietor of your business, your exit strategy could be selling your stake of the business to a business partner or investor.
If this is your chosen strategy, you should discuss with your business partner and see if they would be willing to buy your stake. If they are, your exit should be fairly straight forward as your business partner will be easy for you to approach. If the business has grown over the years you should be able to make a profit from selling your share.
Many business owners want to keep their business in the family and to create a legacy. It is also a way for you to pass assets onto your heirs.
This means making plans to transfer the business to a child or other chosen relative.
Keeping your business in the family is a good way of preserving your legacy and business name, however this option may lead to strained family relationships over the stress of running a business. It is also important that you make sure your chosen family member is the best person to be running your business. You need to make sure that they have a relevant skill set and are committed to the future success of your business.
This exit strategy is quite flexible and allows you to prepare the family member for taking over the business and getting them involved as soon as possible so they have a thorough understanding of how the business is run. It also allows you to choose exactly when to exit your business and gives you the option of staying involved in the business to your chosen capacity, such as taking a business advisory role after exiting if you wish.
However, you might not have a family member who is willing to take on the role and it may bring a lot of stress to your family. Existing employees, business partners or investors may object to your chosen family member taking over the role.
When you come to sell your business, people who already work for you may want to buy your company from you. This option could lead to a smooth transition and is a good way to preserve your business legacy and existing customer relationships.
Your employees will already have a thorough understanding of how your business works and know the corporate goals and culture. This could also lead to a flexible arrangement allowing you to still have some involvement in the business after exiting if you wish.
This option may allow your business to be more successful rather than passing onto an inexperienced family member who does not have a good understanding of how the business works.
A downside is that this could not be your only business exit strategy as your employees may not want to buy your business from you or they may change their mind.
At Four Wealth Management, we offer a small business financial planning service to help business owners with financial planning and increasing the value of their business.
Plan for the future
If you are putting together a business plan or pitching to potential investors, you should have a clear exit strategy in place. You should also make sure that your financial reports are accurate and up to date to help maximise the valuation of your company.
For help creating your business plan or establishing your exit plan, contact a financial adviser at Four Wealth Management on 0117 973 0500.
Four Wealth Management Ltd is an Appointed Representative of and represents only St. James’s Place Wealth Management (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website at www.sjp.co.uk/products.