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What is an Exit Strategy and why do you need one?

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Our entire lives are based on contingency plans. The businesses we run should be no different, and with solid future-planning, an effective Exit Strategy should most certainly be on your growth-planning agenda.

What is an Exit Strategy?

Investopedia describes Exit Strategies as ‘a contingency plan that is executed by an investor, trader, venture capitalist, or business owner to liquidate a position in a financial asset or dispose of tangible business assets once predetermined criteria for either has been met or exceeded.’ What that simply means is it’s an active step towards planning relinquishing ownership or ‘terminating a position that will either maximise benefit, or minimise risk’ (Crunchbase).

If you’re a business owner and entrepreneur, an exit strategy for you means that you’re looking at eventually selling your share of the business – either through the merger or acquisition to another company, a management or employee buy-out, selling your stake to an investor, IPO or simply through liquidation of your business.  A successful Exit Strategy could work out very well for business owners – provided that you’ve spent the time planning what that looks like, and working with the right support to get your business ready for it, and to make it appealing for its next stage.

Why have an Exit Strategy?

Denise Stephan (Crunchbase) writes that ‘having a planned exit is a lot more favourable than an unplanned one’.   Of course, every Exit Strategy is different for every business, and business owner. Goals differ, timelines differ, industry constraints differ, customer habits differ, intentions for the business differ – which is why planning your exit as a way of merely ticking a box, is the wrong thing to do.

A US-based UBS Q1 Investor Watch Report recently conducted a survey in the US amongst the SME community, and it was found that although the majority of small business owners have a desire to, at some stage, sell their business, a startling 48% of them didn’t have any exit strategy planned – and most of this was simply down to the fact that the majority of business owners don’t have a full understanding of what takes place in the selling of a business.

With the UK SME market making up 99% of the overall UK business landscape, we are almost certain that a similar uncertainty lives amongst entrepreneurs in this country.  M&A activity continues to be a hot topic, with the total value of UK M&A activity in 2018 reaching £182.6 billion, the highest annual value since 2015. Of this figure, £119.9 billion was recorded in H1, according to The Law Reviews.  The appetite is there, but is the ability to take advantage of this appetite awake amongst UK entrepreneurs?

How does an Exit Strategy help your business?

Although an Exit Strategy may be great for the individual business owner and entrepreneur, there are far greater benefits for a business following an active succession plan and growth strategy. Here are just a few:

A business blueprint:  We all need direction, at some point in our lives. And if you don’t know where you’re heading, you’ll never know when you get there. An exit strategy ‘helps define success and provides a timetable for charting your progress’, says

Agility through structure: With a clear path carved out, your teams have the freedom to test, and change and adjust. Agile methodologies and approaches to work become commonplace, while still remaining focussed on a clear, strategic growth plan.  Teams feel fulfilled and valued.

A united goal and culture: Having a clear direction means that your teams are all focussed on the same outcome too. A single goal that underpins and drives every decision, every change of course, every behaviour towards growth, every metric.  Value become easier to demonstrate and a united company culture drives a growth mindset throughout your business functions.

Business-of-today, and tomorrow: Having a clear plan means that you, as the business leader, can entrust your teams to deliver business-of-today while you give yourself the resource and mind space to think about tomorrow. Decision-making becomes strategic, risk becomes managed and growth, anticipated.

Types of Exit Strategies

When you’re starting a business, you may not want to be thinking about how it ends, but you should be. Here are a few examples of types of exit strategies that business owners plan for.

Family Succession: Also known as the ‘Legacy Exit’, this refers to keeping your business in the family. It may be that you intend to hand the business over to a child or family-member when the time is right, assuming they are willing, and ready, to take over. Strategies like these are great opportunities to mentor your successor to develop the skills and attributes they will need to be able to take over and lead.  35% of the Fortune 500 have been made up of family businesses. Some with great success, and some, like Ford, Walmart and Nordstrom, not as much when boards and family values don’t often match up.

Investor Sales: You may already have an investor or fund involved in your business, but you hold the majority stake. If you’re planning to exit, you may want to consider selling your shareholding to your investor and transitioning the business across. The benefit of doing this is that there is often low impact on the day-to-day running of the business as the business, for the most part, continues operating as usual. It’s a very common exit strategy which allows owners to simply transition their part of the business, to someone else already invested in the business.

IPO: Initial Public Offerings (IPOs) are the practice of selling shares of stock of your privately-owned business, to the public on a stock exchange.  Many business owners see IPO as a quick way to achieve growth, and (quite often) as a way for them to achieve exit quickly. And for many, it is. But for many who don’t do the necessary forward-planning, they quickly come unstuck by either not achieving IPO at all, or through a reduction in value after listing, simply because their intentions for a long-term growth plan didn’t match up to their desire to achieve quick growth succession.  The expense of pursuing IPO can quickly become a massive stumbling block for businesses who want to grow, and business conditions suit the expectation of the public, to ensure continuous growth after listing.

Mergers & Acquisition: This happens when 2 businesses merge, or one business buys another, taking a majority share. There may be a number of reasons why businesses want to join forces, but for the most part it would be to increase market share, take advantage of specialist skill, incorporate new product offering, reach a new audience. While most popular amongst many SMEs who startup a new and exciting venture, business owners should always consider a merger or acquisition with an entity that has the best interests of the business at heart.

Management (and employee) Buy-Outs: This is when business owners sell their majority stake in the business, to existing employees or management teams. The benefit of this type of exit lies in the fact that the succeeding teams already work in the business, and understand how it works. And with this plan in place, you have the luxury of time to get your teams up to speed to adequately take over and continue to build the legacy you started.

Winding up: Not all businesses need to continue on forever, and there is no obligation for your business to carry on indefinitely. For many business owners who are ready to move onto something, they simply choose to wind up their existing business. This means that your creditors will be paid (whether through disposing of your assets or through the cash you have in the bank), and the remaining assets to be split amongst all shareholders.

How do I get started?

There are a few questions that you’d need to ask yourself, before getting started. Fundamentally, you need to decide what your end goal looks like.

  • Do you want a clean break or do you want to simply become part of something bigger?
  • Do you have existing investors and shareholders in your business that you need to consider and does your existing team have the necessary skill to continue on as they are?
  • Is your business able to function with the current skill and resource or do you need to augment your team through a much larger, more influential entity?
  • Are you completely aware of what your existing business looks like, and what your cash flow looks like?
  • Are you completely up to date on critical business processes and are you operationally sound to be able to build a future for your business that will see long-term growth?

If any of these questions make you feel slightly uneasy, that’s ok. That’s where we can help. We’ve worked with entrepreneurs and business owners, investors and boards for many years – and we understand what it takes to grow, but we also understand the individual’s passion and commitment to building something that sees that growth.

We’ve also helped business owners transition out of their businesses and plan for their succession.

If you’re ready to look at the future of your business, and what that looks like for you, then we’d love to chat.

It’s time to start planning your succession. Talk to us today. 

An IPO is a transformational event for any business, and you need to be ready to deal with the additional demands and scrutiny that being a public company brings

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