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How to Nail Your Exit Strategy

Monday 17 August 2020

Written by Roy Butcher

How to Nail Your Exit Strategy

How to Nail Your Exit Strategy

The purpose of this blog is just to provide a basic overview and does not in any way try to discuss any of the tax considerations, which further advice would need to be obtained. 

A  business exit  strategy is a planned process to ultimately retrieve the maximum value built up within your business, at an appropriate time, from the transfer of your ownership in a company to a third party.  

An  exit  strategy gives a  business  owner a way to review their options in order to fully liquidate, or even partly release value in a  business  and, which if successful, will hopefully make a very well-earned windfall. 

Why is it important to have an exit plan? 

A planned exit will always be preferable to one that is forced by circumstances. Planning lets you choose the means by which you leave, and to position the business for that specific strategy.  

This helps ensure the smoothest possible transition while releasing maximum value from the business. Just as importantly, it is the best way to safeguard the health of the business into which you have put so much time and effort. 

What are my options to exit my business? 

1) Sell on the open market 

Positioning your business for acquisition can prove to be very profitable. Businesses buy other businesses for all kinds of reasons, as a quick path to expansion, realising synergies from complementary business activities, or simply buying out the competition. 

Advantages 

  • A profitable business should be attractive to buyers and sell quickly. 

  • Assets and goodwill can be incorporated when valuing the business for sale 

Disadvantages 

  • Businesses can be difficult to value and the selling price may be much lower than expected.  

2) Keep it in the Family 

The dream of many small business owners, keeping your business in the family ensures that your legacy lives on and provides a living for your heirs. 

Advantages 

  • Can make for a smooth transition   

  • May allow for you to keep a hand in the business in an advisory (or other) capacity. 

Disadvantages 

  • Family members may not have the skills (or interest) to take over the business. 

  • Clients may not approve of new management or changes in company direction. 

3) Management buy out 

Managers may be interested in an opportunity to acquire the business. 

Advantages 

  • The business can thrive as employees will get an established business that they are familiar with and are enthusiastic about. 

  • Arranging a long-term buyout bemployees can increase loyalty and greatly motivate staff to work hard to make the business succeed.  

Disadvantages 

  • Employees may not be suitably qualified to take over the business. 

  • Clients may not approve of new management or changes in company direction.  

4) Winding up 

In this exit strategy scenario, the owner extracts most, if not all the profits out of the business over time (before eventually selling or closing the business), rather than reinvesting the reserves in the company for expansion.  

Advantages 

  • Lifestyle — maximizing cash withdrawal on an ongoing basis for personal use  

Disadvantages 

  • Extracting the profits reduces the growth potential and eventual value obtained from any potential sale 

  • Salary is taxed as personal income, whereas profits remaining in the company increase the value of the business and will be taxed as capital gain when the business is sold. 

Whether you want to sell, pass on to a family member or just simply take a step back – taking time to plan now will benefit all involved.  

The Best Exit Strategy 

I of course refer to the importance of a Business Plan, on which I have written separate articles on. Your  business plan  should include a section on exit strategies, preferably with a couple of chosen options, mainly if circumstances make your first choice difficult. These plans will prove useful in shaping your overall business strategy. 

The best exit strategy is the one that best fits your small business and your personal goals. Decide first what you want to walk away with. If it's just money, an exit strategy such as selling on the open market or to another business may be the best pick. If your legacy and seeing the small business you built continue are important to you, then family succession or selling to employees might be best for you. 

Whichever exit strategy you choose, you need to start planning, which allows you the time to do it correctly, and maximize your returns. 

If you would like to nail your exit strategy and transition your business to new ownership in a managed and systematic way, please get in touch with me at roy.butcher@raffingers.co.uk  

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