Consider your exit strategy when starting up

When you’re setting up your business it’s essential to think about how you’ll ultimately end your involvement with it.

A well thought-out exit strategy can help you to maximise the value you get from your business, successfully market your business to potential buyers or investors and ensure you end your involvement with as little disruption to the business as possible.

Regardless of whether your exit occurs to a planned schedule or you are forced to make a move for unexpected reasons, the decisions you make when setting up can affect how easy it is for you to eventually exit your business.

This guide provides an overview of how some decisions can affect your ability to exit the business successfully, and shows you how to prepare and manage your business to maximise its value. It also covers the different exit options available and outlines their advantages and disadvantages.

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Why you need an exit strategy

If you’re setting up a new business you’ll have a clear vision of what you want to achieve from it. To maximise the value you get from the business it’s essential to think about how you’ll leave it further down the line.

Carefully planning your exit from the business can help you to:

• mould your business into the ideal shape for your chosen exit option – maximising the value you get from it
• groom successors if they’re coming from within the business – whether they’re a family member or part of your management team
• exit at a time of your choosing, when the business is doing well and the market conditions are advantageous

Ideally, you should include an exit strategy in your start-up business plan. It can then be reviewed and revised whenever you work on your annual business plan and budget – and you can steer your business in the direction that your exit option demands.

If you manage an existing business and don’t have an exit plan, you should now think about what your preferred exit option might be – and consider whether you could change the way you run your business to help you achieve it.

The way in which you exit can affect:

• the value you and other shareholders realise from the business
• whether you receive a cash deal, deferred or staged payments
• the future success of the business and its products or services
• whether you retain any involvement in or control of your business
• your tax liabilities

You can download a guide to exit planning [opens in a new window].

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What do you want from your business?

Before you think about the commercial factors that will determine how you will exit your business, it’s worth considering more personal matters. Your reasons for starting a business and the type of business you set up will help determine your exit options.

Your objectives when starting a business might include:

• being your own boss and drawing a salary and arranging a pension scheme
• creating a business to pass on to family members
• generating capital growth and making money by selling the business
• creating an invention or piece of intellectual property, developing it and selling the business quickly

A hairdressing business may fulfil the first objective. But whether you can sell it as a going concern might depend on whether you still play a hands-on role.

If you are no longer styling or cutting hair it will be easier to sell on your salon, its customers, goodwill, and regular cashflow. If most customers still want you to cut their hair, it will be more difficult to sell the business as it will be harder for potential buyers to differentiate the business from you.

If you’re starting a business to make money through capital growth, your exit options may be wider. If you build a high-growth business in a thriving sector you may be able to sell the business to trade buyers, consider a merger or even a stock market flotation.

For further information, see the pages in this guide on exit option: selling your business and exit option: float your business.

To find out more about the option of passing or selling a business on to family members, see the page in this guide on exit option: family succession.

Other options may also be available to businesses coming out of a controlled environment with an established reputation – such as a business-incubator enterprise or spin-outs from companies or universities.

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Decisions that could affect your eventual exit

It is easy to forget that the decisions you make today will not only affect how successfully your business gets off the ground, but can also seriously impact on your eventual exit from the business.

Key considerations

• Business form – the legal structure you choose can restrict your exit options and affect how potential buyers view the business. For example, a sole trader can simply close the business and pay off any outstanding liabilities but a limited company with a separate legal identity might be more attractive to potential buyers. See our guide on legal structures: the basics.
• Articles of Association – these set out the rules for running the company affairs. If they are too restrictive they could limit what the business can and can’t do. This could put off potential buyers or investors who are looking to diversify.
• Partnership agreements – these may specify what will happen if one of the partners wants to exit the business, eg due to ill health, disagreement or retirement.
• Property agreements – these can be notoriously difficult to get out of, if you need to, without suitable break clauses or the right to assign your agreement to another party.
• Shareholders – the involvement of shareholders with voting or preferential rights can make it more complicated for an outside investor or buyer to take over the business. See our guide on shares and shareholders.
• Capital and ownership structure – straightforward structures can help make your business more attractive and can minimise potential barriers to sale.
• Accounting procedures – good accounts will give potential buyers and investors more confidence in your business and make completing the sales process easier. See our guide on financial and management accounts: the basics.
• Employee/customer/supplier contracts – clear, simple contracts for all business relationships can help avoid disputes, clarify responsibilities and make it easy for potential buyers to see what they would be taking on.

Before committing to any important decision it is vital to seek advice from a suitably qualified expert. See our guides on how to choose and work with an accountant and choose and work with a solicitor.

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Exit option: family succession

Passing or selling the business you have set up to a son, daughter or other family member can be an attractive option. It allows you to maintain an involvement in the business and pass the assets to your heirs.

If you plan on handing the business on to your children then it can help to involve them in the business as soon as possible, allowing them to gain an in-depth understanding of how things work.

Allowing them to gain experience working in other businesses can be equally important, as this will give them new strategic insight into your activities.

However, you should bear in mind that you can’t be certain that a child or other family member will definitely be interested in taking the business on in, say, 20 years’ time. If you’re starting a business with the clear aim of passing it on to family, you should seriously consider how you could interest the relevant family members right from the start to reduce the possibility of them pursuing other options.

Get advice

A third party such as a non-executive director or business adviser can help you ensure emotions don’t cloud your thinking.

They can help you to answer key questions:

• Will family succession set up the potential for conflict within the business or family?
• Will it provide you with a financially secure future? Or, should you be considering other exit options to maximise your future income?
• Will it be tax-efficient?
• How will family succession affect the chosen successor’s tax liabilities?
• How should you apportion shareholdings between the successor and other family members?

For further information, see our guides on selling or passing a business to a family member and family-run businesses.

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Exit option: selling your business

The most common exit option is selling your business – either to another business, a private investor or your employees or management.

Trade sales

A trade sale occurs when you sell the business (or parts of the business) to another outside party operating in, or allied to, your field. It can be the best way to get a good price – but you’ll need to develop a business that’s attractive to potential buyers.

If your business is not already limited, it may be difficult to achieve a trade sale as the value of the business is likely to be heavily tied to your skills or business relationships. You might also miss out on important tax benefits. The business may also appear less well established and therefore less attractive to potential buyers.

If you did not start out as a limited company, it is worth considering incorporation to give the business its own legal identity. See our guide on how to set up and register a limited company (private or public).

This may also make a merger possible – although this would probably mean remaining with the business for longer than if you make a straightforward trade sale.

Your chances of a successful trade sale can be improved by drawing up and following a clear exit strategy and minimising the potential hurdles to a successful exit. See the pages in this guide on why you need an exit strategy and decisions that could affect your eventual exit.

Selling your business will also be easier if you can:

• show year-on-year increasing profitability
• show that the business can operate without you
• create a high-quality product or service
• develop an innovative product or piece of intellectual property
• build a strong customer base
• recruit a high-quality management team and employees
• maintain premises and assets in good condition

See our guide on preparing to sell your business.

Buyouts

You could also sell your business to managers or employees – known as a management buyout. Buyouts usually occur when employees or managers hear the business is up for sale and would like to buy ownership or extend an existing stake.

This option may not be as profitable as selling to a trade buyer as your managers or employees might not be able to raise the necessary funds to buy the business, or they may pay less as they fully understand the business – both good and bad – from the inside. Consideration should also be given to what might happen if your managers or employees fail to buy the business, ie how you deal with disgruntled or demotivated employees.

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Exit option: float your business

Floating your business – selling shares on the stock market – can be highly rewarding financially. It lets you realise your investment in the business by making it easier to sell part of or your entire stake in the business.

But any financial exit from the business is likely to be partial. Potential investors will be wary if you sell all your shares – and you may not be permitted to do so.

Any float will also affect other existing shareholders or investors. The shareholders agreement may give existing shareholders pre-exemption or voting rights which may make a float more difficult or reduce the amount you can realise.

Relatively few businesses can realistically expect to float as they are unlikely to be able to finance the necessary growth to attract investors.

Venture capital investment

An alternative to stock market flotation is to attract venture capital investment. Venture capital firms or private investors provide medium to long-term finance to your business in exchange for a share in the company. Venture capital funding can be used to grow or develop the business but may also be a way to facilitate an exit from your business by way of a management buy-out or buy-in or via a stock market flotation.

It is important to check exactly what return a venture capital firm is expecting, how they plan to realise their investment and eventually exit the business. See our guides on equity finance and venture capital.

Once you have secured funding you’ll need to build a record over a number of years of delivering strong earnings and profits – and develop a business plan showing how you’ll achieve further rapid growth.

Business suitability

Steps to take to be a suitable business for a flotation or venture capital investment include:

• building a strong management team
• have a robust business plan outlining how growth and profits will be achieved
• setting up a limited company
• developing operational, financial and management systems robust enough to handle both rapid growth and the additional legal requirements of a listed business
• appointing high-quality financial advisers

Because flotations are unsuitable for most businesses, it is important to consider other exit options – a trade sale could be a better alternative. For more information on trade sales, see the page in this guide on the exit option: selling your business.

For further information on floating your company, see our guide to floating on the stock market.

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Exit option: close your business

Closing your business isn’t necessarily an option that’s forced upon you by poor trading conditions or financial difficulties. It may suit both you and your business to close it when you decide to exit.

There are a number of circumstances where planning the closure of your business will be the most practical option. For example:

• your business may be too dependent on your particular skills to make a sale realistic
• family members may be uninterested in taking charge
• unfavourable economic climate
• ill health may force you to retire before you have had a chance to develop the business sufficiently to make an alternative exit viable

It’s important to seek professional advice about your options in such circumstances from your solicitor, accountant or financial adviser. See our guides on how to choose and work with an accountant and how to choose and work with a solicitor.

The way you close your business will depend on the legal structure you have chosen for it. See the page in this guide on the decisions that could affect your eventual exit.

Sole traders may simply be able to close the business and pay off any outstanding liabilities, especially if there are no employees involved. VAT registration, employees, PAYE (Pay As You Earn), tax and National Insurance obligations, premises and finance agreements can all make this process more complicated for anything other than the most simple business. See our guide on selling or closing your business – an overview.

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The exit process

The process you will have to go through will depend on how you are exiting the business.

Selling the business

If you are selling the business there are several stages you will go through:

• grooming your business for sale
• valuing your business
• identifying and marketing your business to potential buyers
• negotiating with potential buyers
• completing legal due diligence
• finalising the sale and transferring ownership

Prior to the sale, you should get the business into shape by reducing unnecessary overheads, debts and excess stock and getting your finances into good order. You will also require detailed financial information, including audited accounts and forecasts which you can prepare in advance. You can read specific information in our guide on preparing to sell your business.

You should seek specialist advice from your accountant, solicitor or corporate finance adviser. They will help you reach a realistic valuation, and identify and market your business to potential buyers. For further information see our guide on how to value and market your business.

For further information on completing the sales process, see our guide on how to complete the sale of your business.

Flotation

Businesses planning a flotation will go through a similar process and will require a detailed business plan, prospectus and accounts which comply with specific accounting standards. For further information on floating your company, see our guide on floating on a stock market.

Closing the business

If you are simply closing the business, the process should be much simpler. You should contact the relevant authorities to advise them you are closing down and calculate and pay off any outstanding liabilities (such as VAT) and debts. See our guide on selling or closing your business – an overview.

If you have employed any workers you will also need to give them the proper notice and any outstanding pay and benefits. For further information on making employees redundant, see our guides on how to issue the correct periods of notice and on redundancy: the options.

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CASE STUDY

Here’s how I planned an exit strategy

Simon Dunn set up Product Chain, a manufacturers’ agent that builds brands for fast-moving consumer goods and sells the products on to retail clients, in 1988. He’s building a five-year exit strategy and plans to sell the business to members of his team. Here’s how he is putting everything into place.
 
What I did

Assess the options

“I’m 52 now and want to exit by the time I’m 57 or 58, maybe retaining some part-time role for a couple of years afterwards. I’ve looked at all the options and selling to key management seems to be the best choice.

“A trade sale doesn’t really appeal as we’re doing something quite specialist and there isn’t an obvious buyer. I thought about bringing in family, but I’m not that keen and neither are they.

“I also looked at floating the company on the Alternative Investment Market (AIM) – the AIM is a market for smaller companies to issue and trade shares on the London Stock Exchange – but estimated that it would cost around £300,000 and that cash is much better retained on our balance sheet.”

Get the right people into place

“Our sales director, Charles Foden, has been with the business for 12 years and I believe he should inherit the benefits of what we’ve all done together to drive the business forward. He’s highly professional, has a BSc and an MBA and already owns 10 per cent of the business.

“We spend an increasing amount of time together now, so he can see the world as a business owner. We’ve also brought in an experienced financial manager to sharpen up our finances and smooth the path for Charles. We’ve already started discussions about how we can handle the process in the most tax-efficient way.”

Sharpen the business

“We’re getting more organised – for example, we’ve bought the freehold of our premises. We’ve also been consistently retaining profit in the business and strengthening the balance sheet. This is essential to create the value that the business deserves. The management team are talking regularly and more formally about succession.

“We’re looking at where we expect the business to be in five years’ time, the kind of people we want to bring in and what we want them to achieve. When the day comes, Charles may want staff to buy into the business too – it’s too early to be definite, but it’s certainly something in both our minds.”

What I’d do differently

Not take on a partner

“Having a partner in the business held me back for more than 10 years. I believe we could have taken the business even further in that time if we weren’t dealing with personality issues and different ideas about how to develop the business. Plus it took a lot of money to dismantle that could have been retained in the business to boost its value.”

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