Updated 24 March 2022
It’s not a case of if, but when. Everyone who runs a business needs to have exit strategies in place - preferably several alternative options. Here we cover the four most popular exit strategies for businesses.
Sooner or later you will leave your business, since even if you never retire, you won’t live forever. But you may have many reasons other than retirement, such as the wish to try something different, extract the full value of your business, or pass over the helm to a new owner or family member. Equally, there may be other stakeholders in your business who wish to exit for their own reasons. That’s why planning in advance is essential, so that you can leave on your own terms.
A planned exit will always be preferable to one that is forced on you by circumstances. Planning lets you choose the means by which you leave, and also to groom the business for that specific strategy. This helps ensure the smoothest possible transition while releasing maximum value from the business. Just as importantly, it is the best way to safeguard the health of the business into which you have put so much time and effort. You don’t want to jeopardise its future with an unplanned exit.
Your basic options for exiting a business are:
Your business plan should include a section on exit strategies, preferably with both a Plan A and a Plan B if circumstances make your first choice difficult. These plans will prove useful in shaping your overall business strategy.
First decide what you’ll want to achieve from your exit. Do you just want to make as much money as possible, or are you also keen to see the business go from strength to strength? Do you hope to pass it on to family, or would you not mind if it ceased to exist? All of these considerations should influence your choice. Read on to find out more about each option.
If your primary motivation is to make a profit, retire, or invest in a new venture, selling your business may be a good route. You need to decide what exactly is for sale: the shares in the business, or the trade and assets (this is usually less tax-efficient).
Then you need to find the right buyer. A good starting point is to approach competitors and companies in related fields. Explore multiple options, as having several interested bidders can increase your sale price.
Work with your accountant to maximise the value of your business in the run-up to the sale. Any flaws in the business will be revealed by your buyer’s due diligence, so conduct your own checks first to address these. You’ll also need a solicitor during the due diligence and contractual negotiations. Selling may take anything up to two years, so plan well in advance and draw up a timetable for keeping the process on track.
Bear in mind that when you sell shares in the company (which you will do as a part of selling up) you will have to pay capital gains tax (CGT) on the profits you've made. However, you may be able to halve your tax bill by claiming entrepreneur's relief.
Passing a business onto one or more of your children is a fine tradition that many families manage successfully. However, don’t let the appeal of it cloud your judgement. When you have someone in mind, ask yourself if they really are the right person for the job – not just whether they ‘deserve’ it.
Passing on a family business can also be a complex process, involving both a transfer of power and a transfer of assets. It can help to arrange for a transitional period so that the new owner can ‘learn the ropes’ and defer to you in a crisis.
You may want to extract some value from your business in the process of passing it on, so talk to your accountant about the most tax-efficient ways to do this.
There are three common ways for the management to purchase the business. In a management buy-out (MBO), the business is bought by an existing management team. In a management buy-in (MBI), a new external team takes over, while in a 'buy-in management buy-out' (BIMBO), the business is bought by a combination of an existing team and an external manager.
Taking one of these routes is often the quickest and most efficient way to exit your business, particularly if the team already knows the business well. However, in an MBI or BIMBO scenario it’s important to consider and mitigate any potential conflict between existing team members and a new external manager.
Winding down a solvent business, or a members voluntary liquidation (MVL) is another common exit strategy. 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, you may decide to close the business and return capital to shareholders before it becomes insolvent.
An MVL has to be dealt with by a professional adviser, to make sure all the business’s liabilities are taken care of. Taxation, employees, pensions and property all need to be considered when winding a business down.
Part of your exit plan should focus on how to boost the value of the business prior to exit, and how you can extract maximum value from the exit itself. A key part of this is deciding when to exit – so keep an eye on market trends, the financial climate and the availability of potential buyers or successors.
To value your business, your advisers will consider the history and future prospects of the business, the performance of other businesses in the sector, and recent sales. They will also pay close attention to cash flow, turnover, efficiency and profitability.
It’s never too early to start thinking about your exit plan. To get started, consider what you might want to do next. Is it time for a new venture? Or time to retire? Then think about how much money you are likely to need for those plans. A clearer idea of what you want to do next can help to shape your plans for exiting your business.