Peace of mind: preparing an exit plan

July 2023  |  FEATURE | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

July 2023 Issue

Every business owner knows that at some point they will need to consider when to leave the stage. However, just when their exit should take place is a matter not always given a predominance of thought.

Exiting a business is a transformative decision, and one that requires good planning. Some business owners may believe they need not worry about an exit strategy until the time comes around, but the reality is that neglecting exit planning is something that should not, and cannot, wait.

“An exit plan is a preparation plan for when the owner leaves the business,” says Gareth Smyth, founder of Hilton Smythe. “Perhaps the owner is selling the business to an alternative company or leaving it in the hands of a relative. It is sensible to have an exit plan in place, as any financial loss is limited, and could even be making money.

“Any business can benefit from an exit plan,” he continues. “There are many different routes to go down when leaving a business, whether more success is anticipated, or the decision is taken to retire.”

According to William Buck, it takes between three and five years to set up a business for a successful exit. Thus, the sooner a business owner starts writing a company exit plan the better, especially if they want to avoid the risks associated with poor business exit planning and realise the company’s true value.

In order to do this, Ansarada, in its ‘Business Exits: Planning’ report, advises owners to consider the following types of exit plan based on the situation in hand: (i) M&A deals; (ii) selling a stake to a partner or investor; (iii) family succession; (iv) acquihires; (v) management and employee buyouts (MBO); (vi) initial public offering (IPO); (vii) liquidation; and (viii) bankruptcy.

“Ultimately, each exit strategy is right for different people, for different reasons,” states Ansarada. “Ambitious entrepreneurs might look at a merger or acquisition, while family succession or MBO could be an attractive option to other business owners.”

Constructing an exit plan

While business owners’ exit strategy tactics will likely differ, there are key elements that can be helpful across the board. These elements take into account the company’s financial circumstances, market conditions, objectives and timeline.

In its ‘What should be considered in an exit strategy?’ analysis, the Corporate Finance Institute (CFI) highlights key elements business owners need to consider, as outlined below.

First, objectives. One aspect that should never be missed in a business exit strategy is the owner’s individual goals. Upon exiting the business, is the owner interested in getting profits or leaving a legacy? Establishing the purpose of exiting the company helps to identify the specific objectives and activities to be prioritised.

Second, timeline. Another factor that should be considered is the time frame for the process. When does the owner intend to sell the business? When establishing a time frame, a business owner should allow for flexibility, which will provide more negotiating power.

Third, intentions for the business. Does the firm owner want to see the business continue its operations or prefer it gets dissolved? Answering this question will help to establish whether the company will end up being liquidated, merged with another, or sold and set up for transition via succession planning.

Lastly, market conditions. Both the current supply and demand for the company’s products or services, and the marketplace demand for businesses are also factors to consider. Are there a lot of potential buyers or only a few?

“There are many benefits of an exit plan, as an owner can never be too prepared,” adds Mr Smythe. “It is better to be ahead of the game than behind it, and an exit plan is a perfect example of this. It allows the firm owner to set goals for the company and its employees in a timely fashion so that they can assess anything hindering its success.”

Simply good business

Amid uncertainty about future market developments and changes to business regulations and government policies, business owners may need to rethink their attitude to exit planning while, at the same time, remembering that good business exit planning is simply good business.

“With an exit strategy in place, an owner has much more control over the business,” asserts Mr Smythe. “While this is an advantage for all business leaders, it is especially beneficial for small business owners. If the business is unexpectedly taking off, the owner may consider selling due to its increase in value – and with an exit plan, this can be done so much quicker.

“Ultimately, there are a variety of exit plans to choose from, but it is wise for the business owner’s strategy to consider implementing only one,” he concludes. “Doing so offers that bit more protection and preparation for any unpredicted success or, in the worst-case scenario, failure.”

© Financier Worldwide

BY

Fraser Tennant