Planning an exit strategy is a crucial step for business owners to ensure a smooth transition out of their business while maximising value. Even if your business is relatively small, it’s a good idea to start planning as early as possible how you will transfer ownership of the business down the line. Here are some key considerations to keep in mind:
Goals and Objectives
Define your personal and financial objectives for the exit. Are you looking for a financial windfall, a comfortable retirement, or a legacy for your business? Once you know this you will be able to work backwards and plan the steps needed to achieve your goal.
Determine when you want to exit the business. Consider market conditions, business performance, and personal goals. Remember that exiting during a period of strong performance can increase your business’s value. Your age and life stage may also play a part in this decision. What is right for a 35 year old with a young family won’t be the same as that of a 60 year old approaching retirement.
Type of Exit
Decide whether you want to sell the business outright, pass it on to family members or employees, merge with another company, or go public. There is also the option of liquidation if you decide not to pass your business on. Each option has its own implications and considerations, so it is worth looking into each route separately before making a final decision.
Ensure your business’s financial records are in order. Prospective buyers will want to see accurate financial statements and records of assets, liabilities, and cash flow. Be prepared for potential buyers to conduct thorough due diligence. This includes reviewing financials, contracts, legal agreements, intellectual property, and more.
Maintain Business Performance
Make sure that you optimise your business’s performance before the exit, as a strong track record of growth, profitability, and operational efficiency can attract better offers. It is important not to take your foot off the gas in the run up to exiting your business, as even small dips in profit can affect the eventual sale price.
Create a transition plan that outlines how the business will operate during and after the transition. This can help minimise disruption and reassure buyers. A key aspect of this is planning how the business will operate when you are no longer in charge. As painful as it might be, you need to work out how to make yourself dispensable, so that prospective buyers can visualise the business without you in it.
Decide whether you want to have any involvement in the business after the exit. Some buyers may want to utilise your expertise, even if it is just during the transition period, and will often build this into the conditions of sale. You may also be able to get more for your business if you are prepared to stay on and realise the short term financial goals of the business. This process is often referred to as an ‘earnout’.
Employee and Customer Relationships
Consider how the exit will affect your employees and customers. Until the sale is public knowledge, maintain confidentiality to prevent negative impacts on the business’s reputation or employee morale. As your exit comes closer it is important to communicate transparently to minimise uncertainty. Plan on introducing new points of contact as early on in the process as possible and provide lots of reassurance to employees and customers that it will be very much business as usual.
Get a professional valuation of your business to understand its worth. This can help you set a realistic asking price and negotiate effectively. Develop a negotiation strategy based on your business’s value, your personal goals, and the market conditions. Be prepared to compromise but also advocate for your interests.
Have a contingency plan in case the initial exit plan doesn’t materialise. This can prevent hasty decisions due to unexpected challenges. And keep in mind that exiting a business can be emotionally challenging. Be prepared for a range of emotions and ensure you have a good support network around you.
Remember, every business is unique, so your exit strategy should be tailored to your specific circumstances and goals. It’s advisable to start planning well in advance to ensure a successful and profitable exit. Seek guidance from experienced financial advisers and business brokers to navigate the complexities of the exit process, as different exit options can have varying tax consequences.
Please note that advice with regard to exit strategy planning may involve the referral to a service that is separate and distinct to those offered by St. James’s Place.
SJP Approved 20/10/2023