Any business goes through a lifecycle similar to our own. It is ‘born’ and then it grows, possibly experiencing a marriage-like scenario through an amalgamation or takeover. Ultimately though, the business will terminate by one means or another.
Commercial people starting a business usually just see or anticipate success and profit forever, but there are a range of reasons why an owner may reach a point in their business timeline where exiting the company is the best decision. Perhaps the firm is booming, and you’re ready to sell it on. You may reach an age where you desire more leisure time or perhaps are forced to retreat due to health implications. All of these reasons are normal and natural, but planning ahead can make a big difference.
Exit strategy, or succession planning, is simply arranging a way out of business ownership or management, creating a plan to sell, transfer ownership, or otherwise exit the business in a strategic and organised manner.
Implications of a disorganised exit
External factors such as financial difficulties, health issues or changes in the market could force an unplanned exit that may not align with your goals or interests. Without a clear exit strategy in place, you could find yourself lacking in control. In this scenario, you may not have adequate time to thoroughly prepare the business for sale, address any weaknesses or properly position it in the market. Unexpected tax liabilities may arise, as well as disputes among stakeholders and other regulatory issues. All of these factors could lead to a devaluation of your business and hinder your ability to pursue other opportunities or address financial needs.
Above all, without an exit strategy, the emotional toll of the process can be heightened, possibly leading to hasty decisions or regrets. This is especially prevalent for business owners who have invested significant time, effort and passion into their venture.
Business exit does not just happen, it needs careful organisation from a long way out, and having a clear plan in place can help mitigate these risks. So, how do you go about creating an exit strategy?
Making a strong exit strategy
Succession planning involves analysis of the future not just from here and now, but from more or less the start of the business. The specific details of an exit strategy will highly depend on the nature of the business and the overall goals of the owner, however the following core considerations will apply in most circumstances.
In order to curate a successful exit strategy, you should have a clear understanding of what you want as an outcome. It may be that you wish to maximise financial returns or address the goals of stakeholders. Comparably, you may want to ensure continuity for employees and customers, or preserve the company’s legacy. Whatever your goals, define clear objectives within the exit strategy.
How you will achieve these objectives? What is your desired exit route? You may plan to one day sell the company to a willing buyer, or perhaps merge with another company or pass the business down to a family member. A range of factors may render this method unfeasible at the time of exit, but it’s important to have a clear understanding of how you want the transition to move.
How will you value your business at the time of exit? You could use financial statements, market analysis, asset valuations, or a combination of alternative methods. This should all be clearly documented within your exit strategy. You must also outline how any debts, loans and other liabilities will be settled or transferred.
Consider what you want for your employees and management during and after the exit. Will you offer retention incentives, or opt for redundancy or severance packages? How will you inform employees of the exit? This also applies to customers, suppliers and key stakeholders if you wish to maintain transparency and reduce disruption.
It’s important to work with professional advisors, accountants, lawyers and brokers to ensure that the correct documentation is put into place at each step of the planning process.
Maintain fluidity
A strong exit strategy will have alternative routes outlined in case the original plan cannot materialise. Despite this, your ideal exit strategy may evolve over time as circumstances change. It’s important to regularly review and update the plan (and the alternative plan), adapting alongside market conditions and the company’s performance.
No two businesses are the same, but preparation and planning are universally worth the effort.
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John Roberts is a Partner and Director at Austin Lafferty Solicitors. John has been with the firm for almost 20 years, with experience in all areas of business law.
