When and why you should start planning an exit strategy

No matter what size your business is, it is important to have a plan for your exit strategy. Here we discuss why you should start planning your exit strategy now if you have not already done so.

Who needs exit planning?

Many businesses are started with the aim of seeking a trade sale of the business at some point down the line. Other businesses may be started with the plan for the owner to own the business for the foreseeable future. Whichever scenario is true, an exit strategy is still a sensible thing to always have in place.

For anyone seeking investment in their company, having a clear exit strategy is essential when seeking funding.

Having solid plans stating what should happen with the ownership of a business down the line can be extremely valuable. Whether the plan is to be acquired by another company or having a management buyout, the option you choose needs to fit your needs. Having it all planned out can help make the process smoother when it is needed.

Why you need an exit strategy

Careful planning allows you to mould your business into the ideal shade for your chosen exit option. This in turn will help you maximise the value you get from it. It can help you leave the business at a chosen time rather than it being a rushed decision. It can also help prepare your intended successors, providing you with more control.

Exit strategies and business plans

Including your exit strategy in any business plan can be important, especially if you are asking for funding and investment to grow your business. Even if you are not planning on seeking funding, having the strategy formalised in your business plan can help your plans to be carried out in a smooth way. It also means you have the option to review and amend it on a regular basis when you work on the other elements of your business plan.

What types of exit strategy are available?

There are a myriad of exit strategies available to businesses. Here are some of the most common options.

Company sales and mergers

When a business decides to sell to another company, that company either acquires it as a separate entity or merges it into their own business portfolio.

A merger or sale can be a great way for the business’ products or services to reach a new demographic or market. Although we mainly hear about large scale mergers and company sales, this is still a viable option for businesses of all sizes, including start-ups.

People may want to acquire your business in order to break into a new market or to give them a competitive edge. There are many reasons why mergers and sales take place and if your business is in demand, this may be an excellent exit strategy to consider.

Management buyout

Some people, when they want to leave their business, turn to their employees to take over. Management or employee buyout has many advantages. They know how the business is run and have the relevant skills and knowledge of both the industry and company culture.

This option often means the company legacy lives on, which may not be the case with other options.

Family succession

Another popular option is family succession. Like management buyouts, a family succession often means that the successor has extensive knowledge of the company. It can also mean you retain some level of involvement if that is what you wish.

It is important to ensure the people taking over the business have sufficient time to build up the necessary management skills and are committed to the future of the company. Doing all this over a period of time will make the process smoother when you want to retire from the company. If you start a business with the clear aim of passing it on to family, it is imperative that family members are encouraged early on to learn the business’ operations and culture.

A business advisor can help you determine whether family succession will be tax efficient. Also whether or not it has the potential for conflict within the business or family.

Liquidation

Liquidation is a common exit strategy for many businesses. Not only is it one of the fastest options, it can also sometimes be the only viable option. No natural successor, ill health, not financially viable or unfavourable economic conditions all may mean that liquidation is the only route to go down.

Once the company is liquidated, profits made from selling assets will first be paid to any creditors before going to the owner. To make money through the liquidation option, the company must have valuable assets such as land, property and equipment to sell or cash reserves to distribute.

Which strategy is best?

There is no one strategy that is universally best. The type of strategy you end up adopting will be completely dependent on several factors; the type of company you are, your financial situation and what your business goals ultimately are. All businesses are different so there is no single exit strategy that is the best option. It depends on the business itself and the owner’s situation. Regardless of the business or industry, however, it is never too early to plan your exit strategy

Business owners can never predict the future. However, having an exit strategy in place can help provide a steer to the business’ future. Considering all the options in advance means that you do not rush what is an important business decision. If you need any advice regarding which options are best for you and your business then please get in touch with the Wright Vigar team.