Planning the right exit

As such, while it may seem counterintuitive, details of exactly how you are going to exit your business should be an intrinsic part of your initial business plan and can aid your investment planning.

At Bank of Scotland Private Banking we are only too conscious that potential private investors favour businesses with clearly identified strategic goals. Therefore, a business plan with a carefully considered exit strategy could provide private investors with the confidence they need to invest for the longer term.

In truth there are really only half a dozen ways to activate an effective exit strategy.

1. Sell up. Selling up is by far the most common approach. Whether via a merger with, or acquisition by, another business, private equity firm or group of private investors, entrepreneurs can aim to achieve the best returns by ensuring their businesses are as attractive as they possibly can be to potential purchasers.
   
   Maximising the opportunity is likely to depend on:
   
   
   • A clearly defined business strategy
   • A tried and tested management team
   • Effectively divorcing yourself from the long term future success of the business as a business that is constructed around the current owner’s skill set, personality and contacts could be less attractive to potential purchasers.
   However, more often than not, entrepreneurs will be required, as part of the sale, to remain with the business for a stipulated period of time.
2. Management buy-out. Management buy-outs are most effective when your management team has been working towards this scenario for some time. With the lure of potential ownership, members of the team should be working towards growing the business in which ultimately they themselves will have a a direct economic interest.
   
   Maximising the opportunity is likely to depend on:
   
   
   • Employing different financial and legal advisers from potential purchasers (i.e. the management team)
   • The quality of the relationship with the management team
   • A mutually agreed price which could be lower given the absence of a competitive offer.
3. Employee buy-outs. Employee buy-outs are becoming increasingly popular. Just as with management buy-outs, incentivised and actively engaged staff can lead to better company performance.
   
   Employee buy-outs are also favoured by the government and can be subject to company and tax benefits such as Enterprise Management Incentive Options, Company Share Option Schemes and Share Incentive Plans. Also, as with management buy-outs, the sale valuations can be lower with the absence of competitive offers.
   
   Employee ownership can be facilitated through long-term employee benefit trusts, such as those run by the John Lewis Partnership, Tullis Russell and Arup.
4. Succession. There may also be the option to keep the business within the family with some succession planning. However, the risk here is the heart ruling the head at key decision points. Emotional attachment to both the business and the family and other dependents, coupled with desire to secure their future may cloud the judgement.
   
   Maximising the opportunity is likely to depend on:
   • Ensuring the intended successor has a genuinely shared passion for the business and wants to take on the responsibility for it
   • Securing and retaining the support of the existing management team.
   If this is the chosen exit strategy, entrepreneurs should mentor and nurture their successors for as long as it takes to ensure a seamless transition.
5. Initial Public Offering (IPO). IPOs are an established approach to exiting a business, but both the cost and time involved in organising a stock market floatation can be extensive, making this strategy most appropriate for high- turnover companies. Small- and medium-sized enterprises (SMEs) could consider ‘going public’ via the less-regulated Alternative Investment Market (AIM) in London. Both approaches are, of course, subject to the vagaries of the financial markets.
6. Liquidate. Liquidation conjures up negative connotations, but if a business has been built around one individual, and especially if there isn’t an obvious successor, then closing it down can be an efficient way to release collateral. Liquidation could be the most prudent approach to asset management: close the doors, sell the assets, clear any debts and re-invest the capital.
   
   Maximising the opportunity is likely to depend on:
   
   • Whether the premises are owned or rented
   • Achieving the best price for the physical assets
   • Realising the value of any patents, trademarks and business licences.
   Money spent on expert valuations could reap real rewards.

The critical factor in all of these exit strategies is the planning. And, in all but the last, on gradual withdrawal from the business whilst ensuring it is passed into safe hands.