The directors recently attended a trade show and were approached by a major UK company who expressed an interest in their products. Initial discussions have been held and it seems likely that the company will enter into a one year contract worth £3.5m. What a fantastic opportunity as the profit margins are significant on the products which they will be supplying.
This lead me to ask the directors about their exit strategy, to which came the response “we haven’t thought about it”. They seemed surprised that I had asked the question. They advised me that as the company had not been trading very long and they believed that there was still significant growth in the company, it had not even occurred to them that they should be thinking about an exit strategy.
One of the issues of not planning for your exit in advance is that you may have to a lot of emotional thinking at the same time as trying to run your business, which can be distracting.
It is important to identify how you are going to get your money out of the business and also how much money are you able to take out.
There are a number of different ways which you may choose to exit your business:-
- Sell the business in the open market. This is often the most popular option for small businesses. The owners can instruct an agent to market the business for sell for a certain price. The asking price can be determined by using certain formulas which your accountant will be able to assist with. Assets and goodwill can be incorporated when valuing the business. If you have a profitable business, this will be attractive to potential buyers and therefore you should be able to agree a quick sale.
- Sell the business to the management and/or employees. This can have many advantages as the management and employees are familiar with the business. A long-term buyout can increase loyalty and motivate employees to work hard to ensure that the business is a success. You may wish to negotiate to keep a share of the business and continue to work on an advisory basis.
- Keep the business in the family. This will ensure that your legacy lives on and will provide a business for your heirs.
- Sell to another business/competitor. A profitable business will be a desirable acquisition for a competitor for a number of reasons, including getting rid of one of their own competitors.
- Winding down the business over a period of time. In this scenario the owners would take most or all of the profits out of the business over time before selling or ceasing to trade, rather than reinvesting the profits for expansion. This can be done by taking salaries and dividends over a number of years. If the company ceases to trade rather than being sold and it has no assets and liabilities, you can apply to have it struck off at Companies House.
- Liquidation – if the company is solvent at the time it ceases to trade, the best method for dealing with the company is to place the company into members’ voluntary liquidation (solvent liquidation). The assets are realised and this creates a pot of cash which will facilitate a distribution of the funds to shareholders, as a return on capital, which in most cases qualifies for entrepreneurs relief which can be an attractive option for shareholders.
An exit strategy is something that every business owner should have and it is important to plan your exit strategy as early as possible.