Exit Strategies: How to exit a business

It’s never too early to start thinking about your business succession plan. Here are some key ideas to help you shape your strategy for exiting your business, and understand how much your business is worth.

Exit strategies

Building a business may represent a lifetime of hard work. Having invested so much financially and emotionally, it can make the decision for a business owner to exit very difficult.

 

Here are a few signals which help you to know know when it’s the right time to exit a business:
  • Trust your instincts: You know your business better than anyone. If your gut feeling is that you’re ready for a change, it’s time to explore your options.
  • A change in priorities: If you’re reaching retirement age and / or your health, family and lifestyle requirements have changed. Freeing up liquidity would help you to live comfortably.
  • Loss of economic independence: To help propel your business forward, it may be time to bring in an external investor, which means you lose economic freedom.
  • Ready for a change: If you’ve accomplished your goal of building your business and are no longer challenged, it may be time for a new project.
  • Tempted by new ventures: If you’re thinking about new ideas and projects, it could be time to exit your business.
  • Skillset limitations: You may find that as your business grows, you become less of an asset. Perhaps your business requires external skills or capital to reach its potential.
  • The market may be moving against you: If you recognise that there is a threat on the horizon that could make your business irrelevant of marginal. It may be time to think of an exit plan.
  • An unmissable opportunity: If the timing is right when multiple buyers are interested and the highest price can be commanded. It’s probably an ideal time to cash out.

If the signs are there and you’re ready to move to the next chapter of your life, it’s time to plan ahead and choose the right exit strategy.

HOW TO EXIT A BUSINESS

Do you want to make as much money as possible, or are you keen to see the business progress? Do you hope to pass it on to your family, or would you not mind if it ceased to exist?

Depending on your motivation, there are four common strategies to exit a business:

  1. Sell the business
  2. Pass it on to a family member
  3. Negotiate a management takeover
  4. Wind the business down

Exit Strategy 1: Selling the business

If your main objectives are to make a profit, retire, or invest in a new venture, selling your business to a new business owner may be the best idea. For most people, an business exit strategy means getting the company ready for a change in owner. By putting together a well-thought out succession-plan, it will help to increase your sale price, while making sure your business continues to do well after you’ve left.

There are nine steps to help get a succession business plan in place:

  1. Pick a target potential buyer
  2. Decide how fast you’ll want to leave your business
  3. Get your accounts sorted
  4. Scale back your involvement
  5. Ensure your business has efficient processes
  6. Write a ‘how to’ manual for your business
  7. Drive up the valuation of your business by playing to your strengths and fixing weaknesses
  8. Get a guideline business valuation from a professional
  9. Work on a sales pitch to capture a buyer’s excitement

Exit Strategy 2: Keeping it in the family

Involving both a transfer of power and a transfer of assets, passing on a family business can be a complex process, If you’re looking to extract some value from your business in the process of passing it on, our Private Client Tax advisors can advise you on the most tax-efficient ways to do this.

Exit Strategy 3: A management takeover

There are three common ways for the management to purchase a business.

  • A management buy-out (MBO): the business is bought by an existing management team
  • A management buy-in (MBI): a new external team takes over
  • ‘Buy-in management buy-out’ (BIMBO): the business is bought by a combination of an existing team and an external manager.

When approaching any management takeover, both independent financial and legal advice should be taken.

Exit Strategy 4: Winding the business down

If there is no obvious buyer or successor in your family or management team, or if the business has suffered losses and is unlikely to return to profitability, your exit strategy may be to close the business and return capital to shareholders before it becomes insolvent.

Taxation, employees, pensions and property all need to be considered when winding a business down. To ensure all the business’s liabilities are taken care of, this should be dealt with by a professional adviser.

 

HOW DO I VALUE MY BUSINESS?

 

BUSINESS VALUATION

Your exit strategy plan should include ways to increase the value of your business before you sell it, and how to get the most money from the sale.

 

There are three basic criteria which affect valuation:

  1. The circumstances of the valuation
  2. How tangible the assets are and
  3. How mature and stable the business is.

 

To arrive at this figure, buyers use various valuation methods. However, it’s probably worth noting that, ultimately, the true value of a business is what someone will pay for it. Here is a snapshot of a few of the valuation techniques used:

Valuation Technique 1: Asset valuation

Stable, established businesses such as property or manufacturing companies with a lot of tangible assets, such as equipment and inventory, are often suited to being valued on these assets.

Valuation Technique 2: The price earnings ratio

This can be used to value a business that is making sustainable profits. The Price / Earnings (P/E) ratio represents the value of the business divided by its post-tax profits.

As an illustration, if the multiple is, for example, four times net profit, then for a business that makes £500,000 post-tax profit, the business would be valued at £2,000,000.

However, while multiples of earnings can be used as a business valuation method, there is no standard P/E ratio figure that can be used to value every business and can vary dramatically.

Certain businesses, such as Tech start-ups, can have a higher ratio due to their high growth. Whereas, more mature high street companies, such as cafés or retail shops, will have a lower P/E ratio. As P/E ratios differ wildly, there isn’t necessarily a ‘standard’ ratio that can be used to value all businesses.

Valuation Technique 3: Entry cost valuation

An alternative approach to valuing your business is by reference to the cost of starting up a similar business from scratch. You need to factor in everything that got the business to where it is today – such as, start-up costs, tangible assets, product development costs, building a customer base, recruiting, and training staff.

Following on, you would need to consider any cost saving you could make when setting up and subtracting that from the figure. When you’ve taken everything into account, you’ve got your entry cost – and a valuation.

Valuation Technique 4: A discounted cash-flow analysis

This is based on estimating what future cash flow would be worth today. This method is better suited to mature businesses that have invested heavily with stable, predictable cash flows over many years, such as utility companies.

Valuation Technique 5: Industry valuation rules of thumb

Buying and selling businesses can be more common in certain industries, so those sectors may have established, standard formula, other than profit, as a guide. In retail, for example, businesses are valued on factors such as business turnover, how many customers they have and their number of outlets.

Valuation Technique 6: Go beyond financial formulas

Ultimately the selling price is what someone is willing to pay. Potential strategic value could be considered here, with negotiation skill having a role to play. If the business has desirable relationships with customers or suppliers (intangible assets), it may be more valuable to a buyer. If the buyer doesn’t have a stable team behind them to take the business forward, a strong management team (that won’t jump ship) could also add value.

Valuing your business can help you focus on areas of improvement. If you are buying, selling or running a business, there are many things you can do to help secure a good valuation.

 

Get started

 

HOW DO I GET STARTED?

It’s never too early to start thinking about your succession plan. If you would like help in shaping your strategy for exiting your business, or understanding how much your business is worth please feel free to give me a call.

Further Reading

You may also find the information in these articles useful for the stage of your business

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