Exit strategy

Everyone goes into business with the objective of being successful, but sometimes things do not go as you may have planned or you may simply want to try something new or retire and therefore it is wise to have an exit strategy in place.

When should I start thinking about my exit strategy?

It is best to start thinking about your exit strategy at the start of the business even though this may seem counterproductive and the best way to achieve this is :-

  • to discuss the issue with any business partners or shareholders
  • consider commitments about notice periods if you work day to day for the business
  • ensure the position is recorded in any shareholder or partnership agreement
  • review the position as circumstances change
  • consider pre-emption and/or family succession issues

. As with anything, careful planning yields the best results and a good exit strategy will help you get the best value for your business and help you achieve the best possible outcome, particularly as when the time comes to exit the business it may be unplanned. Furthermore, the better you have planned for your exit the greater the chance it will be at a time suitable to you, ideally when the business is doing very well, when you have maximised your profits and the market conditions are favourable. You can always change you exit strategy as your business progresses.

Another reason why it is good to consider you exit strategy at the very beginning is because later down the line there will be some factors which are out of your control, such as the legal structure of your business. For example, if you are running a company, the rules of your business will be governed by your Articles of Association and if these are too restrictive it could make the business unattractive and therefore you may be unable to sell it off. Alternatively, if you are in a partnership, you partnership agreement will determine the rules for exiting the partnership. It is also worth bearing your exit strategy in mind when leasing property. If you enter into a long lease without a break clause then you will be responsible for paying rent throughout the term of the  lease, accordingly, you should always try an negotiate a break clause within the first few years of the lease and obtain permission to assign the lease to another party.

What types of exit strategies are there?

If you are involved in a partnership then it is likely that your exit strategy is going to be to leave the partnership and allow the remaining partners to continue with the business but issues of course arise as to valuing your stake in the business, whether it gets paid yto you immediately, whether you can simply stop working or contributing to the partnership and possibly liability for any debts.

 If you are a sole trader, unless your business is extremely lucrative, you will probably close your business and pay off any existing liabilities. Alternatively you may have started your business with the intention of passing it on to a member of your family, usually children, and therefore your exit strategy may be relatively simple. However, there is always the chance that your children may not be interested in taking over the business.

The most common business exit strategy is to sell the business. Businesses are usually sold when the owner wants to retire, but not all business owners have this luxury. So, who should you sell the business to? You may have a few options as to whom you sell your business to and each option should be considered on its own merits, but usually the interested is likely to be another businesses or a private investor. You may decide to sell your business to someone else in the same trade, although you should be weary that someone in the trade will have a good idea of the value of the business and will scrutinise all the details. A trade purchaser may also wish to merge the business with his own.

You may sell your business to a manager or your employees, which is known as a management buyout. You could also float your business by selling your shares on to the stock market, which can be very profitable, but is only likely to be relevant for large successful businesses. The equivalent for a smaller company or business would be to sell shares in the company to private investors or a venture capitalist.

The actual exit procedure will depend upon which exit strategy is suitable for your business taking into account its legal structure. Nevertheless you will have to go through certain procedures such as valuating the business, identifying buyers and negotiating and completing all the legal paperwork. Accordingly, it may be prudent to obtain specialist advice from an accountant, solicitor or financial adviser.

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