What’s your Exit Strategy?

When you own your own business you have a multitude of matters to think about everyday to ensure the business runs smoothly, efficiently and profitably.

The last thing on the mind of most business owners is ‘an exit strategy’.

The Small Business Service carried out a survey in 2004 and concluded that more than 100,000 businesses fail each year in the UK because of a lack of succession planning.

When you start up a new business you would usually have a clear vision of what you want to achieve. It is at this stage you should also be thinking about your exit strategy as this could influence the way you set up the business and how you manage from its inception.

If you think about your exit from the business it will help you to:-
Structure the business in a way that will enable you to maximise the value you get from it.
Prepare successors within the business – perhaps family members or the management team.
Exit at a time that suits you preferably when the business is doing well and the market conditions are favourable.

You may decide that deciding on an exit strategy before you have got started is premature – however, you should start planning for succession two to three years before you hand over ownership.

There are effectively four options available to you when the time comes to ‘step-down’.

· Family Succession – often a preferred option to pass or sell the business to a son or daughter it may allow you to retain an interest in the business and pass the asset on to your heirs - but do they want to take-over and are they committed to taking over, do they have the skills to succeed and/or the experience?

If family succession is your strategy you need to ensure that you groom your successor and ensure they have the best possible chance to be successful. This may mean investing in training and development, considering what role would best suit your heir; direct replacement is not always the most effective. You must also be ready and really prepared to stand down and let the new generation make its mistakes as you made yours – but be there if they need you.

· Trade Sale

Selling a business is the most common exit route – either to another business, your employees or management.

To make your business attractive you need to ensure your business shows year-on-year increases in profitability, build a strong customer base, recruit a high quality team and maintain premises and assets in good condition.

Management or employees may be interested in a ‘Buy-Out’ so you should consider whether they have the desire and skill to succeed.

Once you have identified potential buyers whether they are external or internal you will need to determine a ‘value’ and set a realistic price. Once you have done this you will have to enter in to negotiations that can take several months.

In a relatively small economy like the Isle of Man a realistic price for your business can be much more difficult to establish than it would be in the UK where there may be more potential buyers and easier access to Venture Capital to fund the purchase.

You should seek independent guidance in valuing your business in a way that is appropriate to your business. Do not get too carried away by ‘fancy’ formulas or methods of calculating the value – these are only indicators which may help you compare the value you have in your mind with what has been paid for similar businesses in the past. The price you can command will depend on so many different factors including the value of ‘key players’ – including you - to the business.

Sadly, and far too often the value put on a business by the vendor is often far higher than the perceived value to a buyer.

The ‘real value’ of your business is what someone is prepared to pay. Tangible assets have a value that can usually be independently verified e.g. property and machinery – there is no easy way to value Goodwill i.e. goodwill, in simple terms, is the amount an acquirer pays for the business above the agreed value of the tangible assets.

You should remember that an acquirer, whether it is a competitor or your management team, may have to finance the acquisition by raising Venture Capital and/or bank borrowing. This can be costly and may make funding the acquisition with an upfront payment impossible. You may have to consider accepting deferred consideration based on future performance – this is called an ‘earn-out’ and regularly used as a method of acquiring a business. In these circumstances you may be required or want to remain in the business to ensure your earn-out is protected.

· Float your Business

If your business has significant future growth potential then floating your business can be very rewarding financially. However, it is unlikely that this option will provide you with an immediate financial exit as you will be expected to remain involved financially and operationally.

If selling shares on the stock market appeals to you then you need to prepare by building a strong management team, develop operational, financial and management systems robust enough to handle rapid growth and the additional legal requirements of listed businesses.

The process can take many months and can be expensive in time commitment and financial costs but it can generate capital which will enable you to grow the business rapidly.

Whilst an unsuitable exit route for most businesses it is available for businesses that have growth potential, strong management and operate in a market that will generate enthusiasm in investors.

· Closure

Terminating your business is not necessarily an option forced upon you and is often the option you have to take if the business is too dependent on your skills; when family members are uninterested in taking charge or if ill-health forces early retirement.

In these circumstances it is important to seek professional advice about your options.

In summary:-

The exit process will clearly be dependent on the route you choose to go down.

You should consider seeking independent advice to help you decide and then work through the implementation with you.

If you are considering selling you may need to cut overheads, reduce debt and excess stock and ensure your finances are in good order. You will need to ensure your audited accounts are up to date and prepare forecasts.

If you are planning a flotation you will need to go through a similar process but you will also need a detailed business plan, prospectus and accounts in a specific accounting format.

An independent non-executive director will be able to help you through the process working alongside professional advisers who have experience in guiding businesses through the process.

Whatever you decide an ‘Exit Strategy’ will help you make a conscious decision and help you focus on what you need to do whilst managing the ‘day job’.

Clive Parrish is the Managing Director of CDP Associates Limited, Business Consultants based in Douglas, IoM (01624 862732, cliveparrish@manx.net) . He is a member of the Institute of Directors.