DEFINING A BUSINESS EXIT STRATEGY

What Is A Business Exit Strategy?

In order to prosper as a small business owner or investor, it is essential to be forward thinking with your financial planning. For a number of reasons it can be advantageous to develop an exit strategy for your business early on as part of that planning – even if you have a low expectation of using it in the foreseeable future.

Exit strategies are defined as a planned approach taken by those with financial assets in a business, on how they should best liquidate their interests when certain conditions are met.

The intention will be to pass on ownership or control of the business or to liquidate it; the plan being stategised to maximise the profits when transferring ownership, or as the situation demands, to minimise damage.

Why An Exit Strategy Is Needed

Just as when you started in business, you no doubt had a plan to guide you through the early years of your business and its growth, so too it is wise to develop a satisfactory exit plan. This will result in you being well prepared for when your goals are met, or should changes in circumstances demand.

If your business is in its early stages or even a startup, then the singular commitment to developing a transition plan should be given good consideration while developing your enterprise. This determination will influence multiple decisions you make in the future, particularly strategic and structural ones that will ultimately affect the outcome of any future transfer of ownership, be it a sale, merger or acquisition.

Business Owners Exit Plans …

41% Expect to exit
within 5 years
Sell The Business (Private buyer, merger, acquisition, or IPO) 70%
Leave The Business To Family (Family succession) 20%
Shut Down The Business (Liquidation) 18%
Unsure 10%

Survey data courtesy of UBS Investor Watch

When Are Business Exit Strategies Used?

Executing a planned exit far outweighs the option of making an unplanned one! An exit plan may be implemented when:

  • Reducing ownership or when giving up control in your business

  • Passing on ownership to successors such as children

  • Closing down a non-profitable business

  • More lucrative opportunities may become available

  • Profit objectives are met and it is time to execute the next venture

  • Market conditions have changed

  • Limiting losses in an unsuccessful company

  • Personal time takes priority over business time

  • Health issues encroach on business activities

  • An unexpected offer is made for your business

Each of those events may demand demonstrative action resulting in a partial or full exit from the business.

Fortunately for small business owners and private investors there are a diverse range of well formulated and frequently used exit strategies that can result in satisfactory, and even ambitious outcomes.

While most owners plan to move on to retire (65%) or a better work-life balance (49%), equally they believe it’s a good time to sell (65%), showing that money and lifestyle remain the principle drivers.

Key Exit Reasons: Money & Lifestyle

Ready to retire
Life balance
Good time to sell

Survey data courtesy of UBS Investor Watch

THE 11 COMMON EXIT STRATEGIES
FOR SMALL BUSINESSES

  • FAMILY SUCCESSION: Handing the business on

The idea of passing on the business to ones children is a goal for many business owners. This sounds like a simple ambition with a desirable outcome, yet it can become complex and may not be the exit strategy you elect to use.

The idea of having a family business running across the generations can feel wonderfully aspirational and worthy of your family name. As the entrepreneur behind this goal, you will have plenty of time to select and prepare your successor into the leadership position early on.

While some family succession plans are truly successful, the reality is that most are not realised in the way that was originally envisaged.

Family Succession …

90% Of owners wealth is in their business
Family owned businesses that survive the 2nd generation 30%
Family owned businesses that survive the 3rd generation 12%
Family owned businesses that survive the 4th generation 3%

Pros

  • You will have created a valuable legacy that stays on in your family

  • When planned, family succession causes less disruption in the business and has a higher probability of success than other methods

  • By selecting whom you wish to continue your business in good time, you can adequately prepare that person for their eventual business leadership role

  • You have the potential to remain in an operational or advisory capacity within the business after such a transition

Cons

  • The person you wish to be your successor may not have the desire or capability to run the business

  • Transitioning the business to a family member is likely to cause stresses of all kinds within the family

  • Choosing a successor at the last minute can cause additional strains on the business

  • Others who have a vested interest in who runs your business may have objections to your choice. This can include other family members, business partners, employees and investors.

  • Dependent on your location, estate transfer taxes may need to be considered

Founders Concerns Over Family Succession Plans …

Take business in a new direction 57%
Transition ownership outside the family 57%
Profits will be squandered 55%

 

Successor not prepared to run the business 55%
Poor treatment of employees 55%
In-fighting over money 55%
  • SELL TO A PARTNER/INVESTOR: Business as usual while you cash out

Should you be a partial shareholder in your business, it is always possible to sell your own share directly to a partner(s) or an investor. Moreover, as an exit strategy, this share ownership transfer can allow the business to continue without significant interruption.

In addition, new shareholders may bring in supplemental skills and resources, allowing the business to pursue a progressive vision that was previously thought to not be possible.

Pros

  • The legacy you have built can continue

  • Employees, suppliers and customers will see minimal change

  • For you it can mean a full exit from the business

  • You will receive cash for your share

  • Due to trust and familiarity, the process is easier when you know the buyer well

  • New ownership can reinvigorate growth in a business with a new vision

Cons

  • Problems can arise if the process becomes contentious between partners

  • Staff, clients and suppliers may not be happy with any new arrangements

  • Existing clients and staff may lament over new management or changes in company direction

  • There may not be a suitable buyer for your share of the business

  • WINDING DOWN: Draw all profits & scale back commitments

There are a number of reasons why a business owner would want to wind down a company over time, as opposed to an outright sale to a private investor or a liquidation. Most likely it will be to transition use of their time into another business or retirement. Using a planned strategy of winding down the business, the owner has the potential to maintain an income by extracting maximum profits from the business indefinitely.

Normally this is achieved by drawing a large salary or maximum dividends from the business, perhaps across a period of years, before liquidating or selling the business. Other tactics used to facilitate the process can be to reduce overheads, lay off employees, reduce debt load and renegotiate existing agreements.

Pros

  • Your lifestyle will improve as you slowly reduce your commitments and maximise the cash you can draw from the business

  • Day-to-day operations can be reduced at your own pace

  • This is a process that you continue to control across time

  • Can provide a low-maintenance and sustainable income (best case scenario)

  • Could be the best solution when a buyer or merger opportunity cannot be found

Cons

  • Drawing all the profits from the business reduces any growth potential and will hit the remaining value of your business

  • Any other shareholders may be unsettled by this strategy and object unless they receive fare compensation

  • Your personal tax situation could suffer. Drawings can be taxed as personal income rather than the capital gains tax you would pay once the remains of the business is sold

  • You are faced with reducing assets and left tied to the business indefinitely

  • MERGER or ACQUISITION: M&A as a high profit exit strategy

A merger or acquisition is when one business merges with or is acquired by another business that has goals which are aligned with those of the first business. It is often used as an exit strategy as it can allow the owner to negotiate how they will continue working in the business for a set period of time, usually for a transition period, or whether they will just walk away.

Traditionally there have been three principle types of merger for the small business – Vertical, Horizontal & Concentric mergers. Across time, a subset of these strategies have been developed in order to facilitate specific business goals, such as virtual mergers and acquihires (more on those below).

Completing a merger and acquisition deal

If your desire is to exit your business, then typically your goals would be to achieve a higher multiple value for your company in as short a time as possible whilst sustaining:

  • Your business viability and brand

  • Job security for its employees

  • Visible and tangible elements of your legacy

  • Your freedom from the business as soon as is reasonable

Merging with or being bought by a larger company that has complimentary skills and interests, or merging with others in your immediate sector or your vertical has the potential to be a quick and efficient way of achieving these goals.

Pros

  • Large parts of the process can be explored away from the business, maintaining discretion

  • You can negotiate your own duration of exiting the business

  • All terms of the merger or acquisition are negotiable, including price, staff retention and brand usage

  • As a strategic acquistion or merger into a larger group, the multiples value of your business can be significantly higher than if it was bought in an outright sale

Cons

  • Negotiations may be protracted and can be unsuccessful

  • A high level of due diligence is normally pursued by the acquiring party

  • VIRTUAL MERGER: Commit to merge & multiply your multiple!

In a virtual merger, two or more companies contractually agree to operate around a similar structure to that of a regular merger without the legal process or demanding requirements of an actual merger. This arrangement operates under a Letter of Intent and Memorandum of Understanding and is facilitated by a small specialist management team.

The advantages to small business owners are many and have been described as “a new twist on M&A” and come with “potentially exponential results for individuals and small companies”.

Virtual mergers can exist in many market sectors and work with vertical, horizontal or concentric merger structures, thus allowing for fast growth and a diversity of companies to participate.

As a collective, the companies in a virtual merger arrangement can develop a combined value which is multiples of their individual values. Overall virtual mergers provide an excellent vehicle for those pursuing and exit strategy.

Pros

  • Removes the high cost of due-diligence and other legal and accountancy fees

  • Shareholders and leaders remain as they are until a virtual group is sold

  • Businesses within the group are able to leverage combined assets, resources, know-how

  • Companies can withdraw from the arrangement without significant issues

  • Virtual merger groups can grow very quickly

  • Individual companies within the group are likely to have a much higher value at exit

Cons

  • Small monthly management fee applies

  • SELL TO AN OUTSIDER: When you receive an offer you can’t refuse

Selling your business outright to an investor is a type of M&A, relying on a 100% cash buyout from a private buyer rather than alternatives like winding down, liquidation or a virtual merger.

Allowing an outside investor to buy your business can be the consequence of a lot of events in your life, and the motivations behind the sale will impact on your selling options. One thing that is for certain – once your business is put up for sale, the business itself becomes a commodity and will be regarded as such by investors.

Selling your business can be planned and voluntary or it may be a forced sale
Voluntary sale: Retirement, better opportunities, change of location, a great offer is received
Forced sale: Market changes, debt, competition, health, lack of investment

If it is a planned sale you will have the opportunity to maximise its value ahead of finding a potential buyer. In particular you will want to ensure that you personally are non-essential to the day-to-day runnings of the business, making the business a viable option for many more buyers.

If it is a forced sale due to looming bankruptcy or health issues, your options for finding a buyer quickly and exiting with a profit are reduced.

Pros

  • With a planned sale, you can optimise your business for the highest sale price and spend time on finding the right buyer

  • Once sold your investment will become liquid and you can walkaway

Cons

  • You will have no control over your legacy business once it is sold

  • The sale may become forced if the owner does not want to give up equity

  • Disparities between seller and buyer valuations

  • MANAGEMENT BUYOUT: When existing employees buy you out

A management buyout occurs when employees combine resources to buy the business they are working in.

Selling your business to your employees (typically an executive management team) is likely to be a triumph for both parties. It will be great for them as they will  have a deep knowledge and working experience of the enterprise they are acquiring. On your part, you will have enthusiastic buyers whom you trust and who are likely to preserve much of what you have built across years of hard work.

An executive team may have the option of leveraging company assets in order to finance the buyout, providing liquidity for you and other shareholders in the process.

executive management buyout

Pros

  • Owner and Management know each other, so less due-diligence is required

  • Management know how the business runs and have working experience of it

  • The new owners will preserve the company and its values and your confidence will be higher

  • The executive team will work in the company so have a big incentive to make it work

  • The team may offer flexibility on the terms of your future involvement, perhaps as an advisor

  • Can be much easier than finding an outside buyer

Cons

  • There may not be an employee that would want to buy the business from you

  • Existing clients may become unhappy with the management buyout

  • The owner may be less objective when selling to employees and may not negotiate the best deal

  • LIQUIDATION: Shut the shop, sell the assets & walk away

Liquidating your business is likely to be the simplest exit strategy to perform, but is also likely to deliver the lowest return on your investment. In its simplest form the process is one of pulling down the shutters on your business and putting all the assets up for sale. Finally you would pay off all remaining creditors with the cash you make from this process and walk away with whatever is left.

This exit strategy is fast and relatively simple, and may be your only realistic option, especially if yours is a small business that requires you to operate within it in order for it to function.

During a liquidation sale some assets have a high value, such as land, property and possibly intellectual property. On the the reverse side of this is the second hand value of business assets. Even in a buoyant market the resale value of items such as equipment, machinery and inventory can be very low. Additionally, liquidating your business can have an adverse affect on employees, clients and any customers who have come to rely on your business being operational.

liquidation as a business exit strategy

Finally and perhaps significantly, the value in any business relationships that you have developed, client lists that have been built and the general goodwill value cannot be sold during this process and will be lost.

Considering the likely low level of return from the investment you have made into your business, and the effect it can have on your supply chain, customers, clients and employees, you may consider advance planning and reworking your business model and its resources. Doing so will provide you with additional exit options that prove to be less damaging. In this scenario, gaining insight from experienced professionals may prove surprisingly fruitful.

Pros

  • It is the simplest method of exiting a business

  • Depending on the ease of selling assets, the business can be wound up quickly

  • Once done, you are free of the business and its commitments

Cons

  • Generally, Liquidation brings the lowest yield on investment for owners

  • Money comes solely from asset sales, the value in intangibles such as goodwill is lost

  • Prices achieved for asset sales can be disappointing

  • Employee and business relationships will likely end

  • Creditors will have to be paid in cash from the asset sales

  • AQUIHIRE: Using M&A for HR!

An Acquihire is a merger or acquisition where one company acquires another principally for its skilled or talented workforce.

It is a strategy whose use has increased over time and can be a cost effective way of operating parts of ones HR. It has been most prevalent in the tech sector.

While your company may not survive after an acquihire, as the seller you will have had a hand in negotiating the future welfare and career opportunities of your staff.

As employees of a larger company they most probably will have received cash or equity options linked to a retention package.

aquihire as a business exit strategy

Pros

  • You will exit your business free of ongoing obligations

  • Your exit will most likely be profitable

  • You will have negotiated good terms for your employees

  • As the former owner, you can claim “My business was acquired by ….”

Cons

  • Market sectors where this practice is used are limited

  • Negotiations can be protracted, similar to regular mergers

  • IPO: Plan an initial public offering

An initial public offering, commonly known as an IPO, is where owners of a private company change its status to a public one, and offer their private holdings for trade on a public stock exchange for the first time.

While being considered a quick way to riches and remaining a dream for some owners, very few small businesses will pursue an IPO plan to its conclusion for a number of reasons.

I include it in this list of business transition plans for two reasons:

business startup planning an ipo exit strategy
  • As tempting as it is, once the basic requirements of an initial public offering are understood it will most likely be dropped from your list of considerations for business exit strategies – saving time on future deliberations

  • It may be a true goal of yours and conditions can become favourable.  If the IPO route does develop into a viable option for your business then it could well become the goose that lays the golden egg!

When considered from the owners perspective, an IPO for a small business can be seen both as a liquidation and a way of infusing cash into the business. This operation makes most sense if the company can explicitly gain from such a capitalisation.

Pros

  • The owner of an IPO gains huge amounts of publicity

  • After a successful IPO, stock can be valued from the tens and into the hundreds of millions of £’s

  • It can be the most profitable exit plan of all

Cons

  • After an IPO, the founder may be forced to step down from the CEO position

  • Very few small businesses actually have this option available to them due to implementation costs, market conditions, attractiveness to investors and regulatory requirements

  • The accounting rigor required from day one of the business is way beyond what small businesses normally practice

  • The owner will have to be promoting the value of the business to business analysts and investors more than they will be working in it

  • Costs for developing and entering an IPO can run into the millions and requires intense scrutiny from stockholders and analysts

  • A successful IPO requires certain conditions, significant time to realise and massive focused effort

  • Business valuation and other criteria are requirements that have to be met and you can be held legally accountable for non-compliance

  • There are different IPO structures and it could mean that your capital cannot be monetized for at least six months and could be subject to a longer period

  • BANKRUPTCY: The last resort when things have gone wrong

Bankruptcy is a legal process for closing a business and paying off creditors when debt value significantly exceeds asset value. Bankruptcies can be voluntary, or a creditor can force one through the legal system.

Regarded as a pitiless process, for the most part bankruptcy is a method of last resort. In the run up to a bankruptcy, alternatives to consider would be restructuring your business, looking at business operations in general and debt negotiations.

Pros

  • Bankruptcy is a formal process that protects you from creditors

  • It relieves you of most debt responsibilities

  • You will leave your business behind

  • You will be able to work on rebuilding your credit and starting afresh

Cons

  • All links to your business will be severed

  • Not all debts are relieved by bankruptcy

  • Your credit rating for borrowing will be adversely affected

6 IMPORTANT QUESTIONS TO ASK

Increase your chances of a profitable exit with these insights & questions

The Best Way To Start Planning For An Exit

The more you plan ahead with your exit strategy, the better. First, you need to be clear in your own mind about the financial goals you want to achieve, then research your options, get to know your choices and be sure to understand the key implications before talking with professionals who have experience in that area.

Subsequent to this process, you may find your decision making changes across certain areas of your business operations. For example, aspects of your organisation, its structure, management and finances will take on new levels of significance as you start to visualise them in relation to your future business exit.

2 Key Questions For Your Own Exit Strategy

To start you off, here are two questions, the answers to which will form the basis for the structuring and timing of your business exit plan:

  • Do you want to stay involved in the business forever?

  • What are your financial goals?

It is never too early to ask these important questions of yourself. Whatever your answers, they will play into your exit strategy. The next step is to refer to our guide which lays out the basics for you very well: 7 Steps To Selling Your Business

The 4 Key Questions Buyers Always Ask Themselves

These are four key questions that most private buyers will ask themselves first when considering your business for purchase:

  • Can the business run without the current owner present or will I be expected to find a replacement?

  • How does the business owner justify its current valuation and is that reflected in the market place?

  • What is the likely return I will receive from my investment?

  • Can I do better elsewhere for the same money?

Why Some Exit Deals Fail To Complete:

A principle cause for most of the deals that ‘fail to complete’ is down to the disparity between how sellers and buyers see the value of a business. This is understandable, as it is challenging to make a totally objective assessment of something that one is so personally involved in.

To make a realistic and respectable valuation of your own business you will need to consider a number of factors in addition to the usual financials. First, in addition to appreciating predicted growth rates of your market sector, it is important to take a serious look at the business-for-sale market place in general within your locale. Likewise, you need to consider how much value investors are currently placing on your particular business type in that geo-location. Above all, you will need to look at these factors from the investors perspective as well as your own.

Businesses That Lack Preparation For A Sale

Businesses that have never been formally appraised 58%
Businesses that have not put in place a formal exit strategy 48%

Survey data courtesy of UBS Investor Watch

Disparity between seller and buyer valuations of a business occur for a number of reasons, most often when sellers apply too high a multiple to a profitability calculation (such as on thier EBITDA).

Example: A local technology reseller business had a turnover of just under £1,000,000. The owner declared a potential value he believed to be in the region of 10-20X EBITADA. The basis for this calculation was on some historical telecom and tech IPO’s and buyouts he had heard about, ones that had significant market share and IP. The reality for his local business profile would most likely be 2-5X EBITADA as being a reseller it lacked its own IP and had minor market share.

The owners perspective

 

Owners invariably have a very personal involvement with their business and a hopeful expectation of what they believe it should sell for. This is understandable considering all that has gone into building the business.

Due to the complexity and risks of the task before them, owners can sometimes feel out of their depth selling a business. Aware that posting too high a price for it can scare off investors, they also won’t want to ask for too little at the risk of leaving money on the table. A further complication is how valuations are calculated and who is calculating them.

Example: Some (but certainly not all) business brokers will encourage sellers to list with them by ineptly furnishing the owner with an unrealistically high estimate on the value of their business.

This can force the seller through a harsh learning curve over its true market value, which really comes down to what investors will be willing to pay.

Having failed to reach agreements or even just to get serious interest from investors, many sellers withdraw, reassess, find new advisors, then attempt to divest again 12 – 36 months later, albeit with greater experience but much later than intended.

The buyers perspective

 

Buyers on the other hand take a more pragmatic approach. Based on an objective assessment of likely growth and profitability, investors will need to know that they can have a fair confidence in the future of the business.

In terms of the valuation, the buyer will assess whether they consider the seller serious about selling their business i.e. Are they presenting a realistic valuation, or is their asking price just speculative?

The investor will have to judge whether they can achieve a better return with the same level of investment elsewhere.

Example: Your business forecast projects a 10% return on a £1m investment, however the same level of investment may be predicted to produce a 15% return on a tried and tested franchise opportunity in a nearby location.

There are a number of reasons beyond the ‘asking price’ that an investor may want to acquire your business, and it’s not to say your business isn’t worth £1m or more, it is just that circumstances will always differ for every business sale. If you want to find a willing buyer who meets all your criteria, then you may need to be flexible over your terms.

What To Do If You Want To Exit Your Business Now

If your business exit is upon you, planned or otherwise, take professional advice (beyond that of your existing accountant) then pick one strategy and stick with it. Simple and actionable today!

Sellers Tips

When using a business broker, you may be required to pay them fees & commissions regardless of who sourced the buyer.
You may not be able to cancel a business broker agreement even if they fail to find you a buyer. Be sure to check the small print!

Who do owners expect to buy their businesses?

Competitors 48%
Employees 30%
Larger Company 15%
Don’t Know 4%
Private Equity Firm 3%

Survey data courtesy of UBS Investor Watch

KEY BUSINESS TRANSITION TAKEAWAYS

Making the decision on how best to exit your business is complex and can become challenging and emotional
Some sellers may find themselves in the fortunate position of being in a high growth sector or they may be approached by a competitor with a great offer, one who wants to expand their market share or stifle competition. These sellers can achieve higher multiples of value for their businesses than the sector would normally allow, but these instances are rare and for the most part cannot be planned for
Analysing and assessing one’s own business and financial goals is a prerequisite to developing the exit plan that will be the best fit for your ambitions
An exit strategy is best planned well in advance, even during the startup phases. Most business owners do not have their exits planned

Well planned exits can make win-win situations between owners and buyers far more likely

Finding a buyer who will match all your criteria is not always possible, so as a seller you can be left with the options of ‘compromise or walk away’. As said before, these decisions can be a challenge!

It may seem like there is no end to exit strategies on which small business owners should deliberate, from shutting down to winding down, family succession, selling to a partner or investor, going the IPO route, being a profitable acquisition for another business, or perhaps looking at a merger or virtual merger with a larger group

While selling the business outright on the open market is the most highly pursued method of exit, it is believed that just twenty five percent of small businesses actually sell this way. The remainder are using other methods of ownership transfer

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