For any small business owner, a well thought through early business exit strategy means that you are prepared and have planned to sell your business or your share of a business at a time that is right for both you and that business. In this article, we cover the most common business exit strategies together with the pros and cons of each.
Contents:
What is an exit strategy in business?
An exit strategy in business is a plan to bring your involvement in a business to a close. Often this means preparing the business for sale and a change of owner.
A well-considered exit strategy can increase your business sale price, whilst ensuring the business continues to thrive under new ownership.
What are the different types of business exit strategies available?
There are several common exit strategies for business. The one you choose will depend on your financial, personal and business goals.
Merger and acquisition exit strategy
An M&A exit strategy means that you prepare your business for sale to a third party company, often a competitor, which may wish to acquire your company for a variety of reasons including increasing their market share, diversifying or to acquire your talent, supply chain or product.
Through an M&A process, you may be able to maintain control of price negotiations and other terms and can potentially run an auction process, attracting multiple bidders. On the downside, such a process can be expensive and time consuming and is not guaranteed to be successful. Equally, competitors will not necessarily be vested in continuing your business as you would have done, which may lead to downsizing, redundancies of people and product and ultimate closure.
Selling to a partner or investor
Where there are two or more business owners, you can sell your share in the business to a partner or fellow investor, often someone you know and trust.
In this business exit strategy, the business will typically continue to operate as normal with minimal disruption and often under the ownership of a person who is already vested in its success. On the downside, persuading another business owner to acquire your share can be difficult and, as these buyers are ‘friendly buyers’, then it can also be difficult to drive a bargain that is most beneficial to you.
Family succession
The family succession or legacy exit means keeping a business, typically but not always profitable, ‘in the family’ so that you pass your share of the business to a family member on retirement or as part of your estate when you die.
This business exit strategy can ensure that whilst the business continues to be run by someone who understands it and has potentially anticipated running it for many years, you can remain involved.
On the downside, not every family member wishes to be involved in a family business nor has the skill set to take it forward profitably.
Acquihires
This is a business exit strategy where your company or business is bought solely to acquire your employees.
This type of acquisition often mean that you are able to negotiate a more favourable price and terms, whilst also being reassured that your employees will be highly valued and retained. Negatively, this is not a common form of business exit strategy with buyers hard to find and, as with M&A deals, it can be time consuming and expensive.
Management and employee buyouts (MBOs)
In MBOs, your company or business management team or a group of employees buy you out of all or your share of the business.
This exit strategy should ensure that the business transitions easily and remains in competent hands. On the downside, your management team may not wish to step up their involvement in the business and may not have the skills to ensure continued profitability.
Initial Public Offering (IPO)
In an IPO, you are taking your business to the public and selling shares to investors who become shareholders in your company. Whilst an IPO has the potential to be extremely lucrative, it is also extremely challenging in terms of the process involved. Once listed, regulatory costs are high and there is added pressure and scrutiny from shareholders and the public.
Liquidation
This is a common business exit strategy for failing businesses. Liquidation is one of the most final exit strategies, whereby the business is closed down and all assets sold off. Any cash earned must go toward paying off creditors and shareholders. This often delivers a quick end to a business though it is unlikely to deliver high value and can lead to breakdown in your various business relationships.
Bankruptcy
Filing for bankruptcy will result in your business assets being seized, but it will also relieve you of financial debts. On an on-going basis, your access to credit will be impacted together, potentially, with your ability to hold formal management roles in another company.
What are the main factors for SME owners to consider?
There are several factors for small business owner to consider when contemplating an exit strategy for their business. Chief amongst these are business valuation and tax implications, which focus on the history and future prospects of your business, cash flow, turnover, efficiency and profitability. Closely linked is timing, namely timing your business exit so that you have time to increase its profitability and therefore its sale price whilst taking account of any tax that may become payable.
Getting the best value for your business involves early planning of your business exit strategy so that you can exit at the point where you achieve best value, taking expert advice at an early stage and deciding between which business exit strategy may suit you best, recognising that there may be more than one.
Finally, many business owners closely identify with their business or company and therefore any business exit strategy has to consider their business legacy and reputation.
How does succession planning work,and what are its benefits?
The term succession planning is a process companies use to pass leadership roles down to another employee or group of employees. Succession planning ensures that businesses continue to run smoothly and without interruption, after important people leave the company. Succession planning is an important part of any business exit strategy to ensure that the business is not only attractive to potential new owners but also that any ownership transition is as smooth as possible.
How do I get started in choosing the right business exit strategy?
Choosing the right business exit strategy, especially as a relatively new business owner or at an early stage of the business, can seem like a daunting task. However, with expert input, it will become apparent which methods are the most appropriate for your business. For more answers to commonly asked questions and advice on company acquisitions, consult our M&A solicitors. Get in touch on 0800 689 1700, email us at enquiries@harperjames.co.uk, or fill out the short form below with your enquiry.
