What is an exit strategy?
A company exit strategy is the process you follow to leave your business. It doesn’t necessarily mean selling your business. For example, for a family business it might mean family members take over instead of selling the business.
5 steps to prepare for your exit plan
Here are five key steps that will help you prepare for a business exit strategy. Some of these will be optional, depending on which option you choose.
1. Get your accounting in order before developing a business exit strategy
If your exit plan includes selling your business, you will need to ensure that your numbers are accurate and up to date. Any serious buyer will want to see a few years of financial records. This will include a balance sheet and income statements (profit and loss) that show the true financial position of your business.
2. Make yourself dispensable
If a business relies on one person to lead and make decisions, it won’t be attractive to potential buyers. When you have managers who can take over the reins when you leave, it shows that your business has long-term potential. Delegate as many tasks as you can so others can run the business effectively in your absence. This will help you open up more options when developing a business exit strategy.
3. Document all business processes and procedures
For many small businesses, the way things are done are in people’s heads and not documented. Business owners take for granted the knowledge they have accumulated over the years. But it’s much more difficult to sell a business if the potential buyer doesn’t have a clear understanding of the processes and procedures required to run the business. To be effective, all departments need to document what they do, including accounting, IT, human resources, sales and marketing, product or service fulfillment, and more. Having a “how-to manual” will make your business more appealing to potential buyers.
2. Confirm fees upfront
One of the causes of late payments is misunderstanding of fees for legal services. If there is an issue with these, the client can raise it before the work is completed. Invoicing regularly for work in progress will avoid surprises for clients.
3. Make it easy for clients to pay you
Offering more ways to pay you can help decrease debtor days. This includes offering payment options, including bank transfers and credit cards. Ensure that the amount, payment terms and payment options are clearly communicated on the invoice. Include contact details for clients to get in touch if they have any questions about the invoice.
4. Get a business valuation
This will account for all tangible and intangible assets minus any liabilities. Tangible assets will include the premises, plant and equipment, and inventory. Intangible assets include patents, trademarks, brand, goodwill, and customer lists. While intangible assets are harder to estimate, they can add significant value to a business. Find out more in What Are Intangible Assets?
5. Develop a sales pitch
Capture the essential benefits of your business to get buyers excited about it. Imagine that you have ten minutes to present your business to a group of potential buyers. Think about the best selling points to present to them. You can also create a document that provides an overview of your business, including items such as company history, finances, business activities, products and services and the market. As this can feel like a daunting task, practise on as many people as you can to get yourself feeling more confident.
Ways to exit your business
There are many ways to exit your business. The right one will depend on your situation and your goals from your business exit strategy.
Keep your business in the family
Although family businesses have unique challenges, they can offer a simple exit strategy if younger family members are interested in keeping the business going. As mentioned above, making yourself dispensable and documenting processes and procedures are crucial steps in making this happen. Succession planning will also include designating who will step into various management roles in the future.
Management buyout as a business exit strategy
If family members are not involved or don’t want to continue in the business in the future, management buyouts (MBO) can be an effective exit strategy that enables business owners to realise wealth from what they have built. Since managers already know how the company is run, they usually won’t need much training in handing over the reins. In some instances, business owners continue to be involved in the business after the sale and receive a salary for offering assistance in handing over to the new owners.
Sell to other businesses
Other businesses could see your business as a strategic acquisition, whether you’re a competitor or in a complementary business, such as a vertical integration. Whatever the reason, documenting processes and procedures, having up-to-date and accurate accounting records, and getting a business valuation will make your business more sellable, which is an important part of any business exit strategy.
Initial public offering (IPO)
Getting listed on the share market through an initial public offering, won’t be an option for many SMEs as it requires much effort and around one year on average to complete. It’s only suitable if a business has been growing quickly enough to justify an initial public offering. Substantial growth over several years is a prerequisite to being a contender in the market to become a public company, so it won’t be suitable for most business owners looking for a business exit strategy. Learn more about this strategy in Is an Initial Public Offering (IPO) the Way to Go for Your Business?
Liquidation as a business exit strategy
If the business can’t be sold as a going concern, liquidation might be the best option. This is often the case for businesses that rely on the performance of one person. In this case, you simply sell off all assets, including property, equipment and inventory. If any intangible assets exist, such as intellectual property, this can be sold as well. Keep in mind that liquidation is the least lucrative business exit strategy, as the goodwill built up by the business will be lost.
Preparing your business exit strategy
Getting ready to exit a business is an important step in your business’s lifecycle. Before you define your exit strategy, consider the steps you will have to take to make it happen what’s most feasible in your situation.