Starting up: consider your exit strategy

Carefully planning your exit from the business allows you the opportunity to:

• mould your business into the ideal shape for your chosen exit option - maximising the value you get from it
• groom successors if they're coming from within the business
• exit at a time of your choosing, when the business is doing well and the market conditions are advantageous

Ideally, you should include an exit strategy in your start-up business plan. You then have the option to review and revise it whenever you work on your annual business plan and budget - and you can steer your business in the direction that your exit option demands.

If you manage an existing business and don't have an exit plan, you might consider thinking about what your preferred exit option might be - and whether you could change the way you run your business to help you achieve it.

The way in which you exit can affect:

• the value you and other shareholders realise from the business
• whether you receive a cash deal, deferred or staged payments
• the future success of the business and its products or services
• whether you retain any involvement in or control of your business
• your tax liabilities

The decisions you make today can seriously impact on your eventual exit from the business.

Key considerations include:

• Business form - the legal structure you choose can restrict your exit options and affect how potential buyers view the business
• Articles of Association - these set out the rules for running the company affairs. If they are too restrictive they could limit what the business can and can't do. This could put off potential buyers or investors who are looking to diversify.
• Partnership agreements - these may specify what will happen if one of the partners wants to exit the business, eg due to ill health, disagreement or retirement.
• Property agreements - these are notoriously difficult to get out of without suitable break clauses or the right to assign your agreement to another party.
• Shareholders - the involvement of shareholders with voting or preferential rights can make it more complicated for an outside investor or buyer to take over the business.
• Capital and ownership structure - straightforward structures can help make your business more attractive and can create a smoother route to sale.
• Accounting procedures - good accounts will give potential buyers and investors more confidence in your business and make completing the sales process easier.
• Employee/customer/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.

Passing or selling your business to a family member allows you to maintain an involvement in the business and pass the assets to your heirs.

If you plan on handing the business on to your children, it can help to involve them in the business as soon as possible so they understand how the business is run.

Allowing them to gain experience working in other businesses can be equally important, as this will give them new strategic insight into your activities.

However, you can't be certain that a family member will definitely be interested in taking on the business. If you're starting a business with the clear aim of passing it on to family, it is worth seriously considering how you could encourage family members to invest their future in the business early on.

Get advice

A third party such as a non-executive director or business adviser can help you ensure emotions don't cloud your thinking and that your thinking is unbiased and logical.

They can help you to answer key questions:

• Will family succession set up the potential for conflict within the business or family?
• Will it provide you with a financially secure future, or should you be considering other exit options to maximise your future income?
• Will it be tax-efficient?
• How will family succession affect the chosen successor's tax liabilities?
• How should you apportion shareholdings between the successor and other family members?

The most common exit option is selling your business. You can sell to another business, a private investor or your employees or management.

Trade sales

A trade sale occurs when you sell the business (or parts of the business) to another outside party operating in your field.

If your business isn't already a limited company, it may be difficult to achieve a trade sale. The value of the business is likely to be heavily tied to your skills or business relationships. You might also miss out on important tax benefits. The business may also appear less well-established and therefore less attractive to potential buyers.

If you didn't start out as a limited company, it's worth considering incorporation to give the business its own legal identity.

This may also make a merger possible. However, you may need to remain with the business for longer than if you make a straightforward trade sale.

Buyouts

You could also sell your business to managers or employees - known as a management buyout.

This option may not be as profitable as selling to a trade buyer because your managers or employees might not be able to raise the necessary funds to buy the business. You should also think about what might happen if your managers or employees fail to buy the business, ie how you deal with disgruntled or demotivated employees.

Floating your business - selling shares on the stock market - lets you realise your investment in the business by making it easier to sell part of or your entire stake in the business.

But any financial exit from the business is likely to be partial. Potential investors will be wary if you sell all your shares - and you may not be permitted to do so.

Any float will also affect other existing shareholders or investors. The shareholders agreement may give existing shareholders pre-exemption or voting rights which may make a float more difficult or reduce the amount you can realise.

Relatively few businesses can realistically expect to float as they are unlikely to be able to finance the necessary growth to attract investors.

Venture capital investment

An alternative to stock market flotation is to attract venture capital investment. Venture capital firms or private investors provide medium to long-term finance to your business in exchange for a share in the company. Venture capital funding can be used to grow or develop the business but may also be a way to facilitate an exit from your business by way of a management buy-out or buy-in or via a stock market flotation.

It is important to check exactly what return a venture capital firm is expecting, including how they plan to realise their investment and eventually exit the business.

Once you have secured funding you'll need to build a record over a number of years of delivering strong earnings and profits - and develop a business plan showing how you'll achieve further rapid growth.

Because flotations are unsuitable for most businesses, it is important to consider other exit options - a trade sale could be a better alternative.

Closing your business isn't necessarily an option that's forced upon you by poor trading conditions or financial difficulties.

There are a number of circumstances where closing your business may be the most practical option:

• your business may be too dependent on your particular skills to make a sale realistic
• family members may be uninterested in taking charge
• unfavourable economic climate
• ill health may force you to retire before you have had a chance to develop the business sufficiently to make an alternative exit viable

It's important to seek professional advice about your options in such circumstances from your solicitor, accountant or financial adviser.

The way you close your business will depend on the legal structure you have chosen for it.

You should get in touch with the relevant authorities to advise them you are closing down and calculate and pay off any outstanding liabilities (such as VAT) and debts.

If you have employed any workers you will also need to give them the proper notice and any outstanding pay and benefits.

Find out more about closing or selling a business.