If you’re setting up a new business you will probably have a clear view of what you want to achieve from it. In order to maximise the ‘life time’ value you get from this new business it is essential to start to consider how you may exit or leave it at a later date.
By carefully planning your exit strategy early you can shape your business into the ideal position for your chosen exit option, e.g.
- by maximising the value you get from it
- by grooming successors from within the business, a family member or part of your management team
- by exiting at a time of your choosing, when the business is doing well and the market conditions are advantageous
In an ideal world, you should include an exit strategy in your start-up business plan – definitely within the first 2 years of trading. It can then be reviewed and revised whenever you work on your annual business plan and budgets.
Before you think about the financial factors that will determine how you will exit your business, it is worth considering more personal objectives. Your reasons for starting a business and the type of business you set up will help determine your exit options.
Your personal objectives when starting the business may include:
- being your own boss, drawing a salary and arranging a pension scheme
- creating a business to pass on to family members
- generating capital growth and making money by selling the business
For example, a translation agency may fulfil the first objective. But whether you can sell it as a going concern might depend on whether you still play a hands-on role. If you are no longer translating or project managing the translators, it will be easier to sell on your agency, its customers, goodwill, and regular cash flow. If most customers still want you to translate their material because of your specialist knowledge, it will be more difficult to sell the business.
If you’re starting a business to make money through capital growth, your exit options may be wider. If you build a high-growth business in a thriving sector you may be able to sell the business to trade buyers, consider a merger or even a stock market flotation.
It is easy to forget that the decisions you make today will not only affect how your business starts up, but can also seriously impact on your eventual exit from the business.
- Business form – the legal structure you choose can restrict your exit options and affect how potential buyers view the business. For example, a sole trader can simply close the business and pay off any outstanding liabilities but a limited company with a separate legal identity might be more attractive to potential buyers.
- Articles of Association or Partnership agreements – these set out the rules for running the company affairs. If they are too restrictive they could limit what the business can and cannot do. Also these may specify what will happen if one of the partners or shareholders wants to exit the business, e.g. due to ill health, disagreement or retirement.
- Accounting procedures – good accounts will give potential buyers and investors more confidence in your business and make completing the sales process much easier.
- Employee, customer and supplier contracts – clear, simple contracts for all business relationships can help avoid disputes, clarify responsibilities and make it easy for potential buyers to see what they would be taking on.
Before committing to any important decision it is vital to seek advice. CMC Partners have put together a number of case studies showing how we helped business owners to grow, and plan exit strategies from the earliest phase – and ultimately prosper – examples are available here. Other blogs from Phil McConnell are available here
If you want to discuss your personal objectives for your business, or if you would like to explore how CMC can support you through your business journey, call 01844 319286 or contact us via this form.