Insights

What is a Business Exit Strategy?

A business exit strategy is a strategic plan developed by a business owner to sell their ownership in a company. This can involve selling to an investor, transferring ownership to a successor, or closing the business altogether. The strategy outlines how and when an owner will exit, considering factors such as the business's value, the state of the market, and the owner's personal circumstances. It is not solely about leaving; it also involves maximising value, ensuring the business's continuity, and facilitating a smooth transition.

 

Why Might Someone Consider Exiting?

Business owners may decide to retire and wish to secure their financial future. Others might want to explore new ventures or need to step away due to health concerns. Some business owners may decide to exit after reaching a certain financial goal, while others might do so due to changes in the market that make the future prospects of the business uncertain. Whatever the reason, a well-thought-out business exit strategy ensures a controlled and beneficial exit from the business when the time comes.

Determining when and how to exit your business can be one of the most significant decisions you make. The path you choose impacts not only you but also your employees, shareholders, and the industry.

 

M&A Deals

An M&A (Merger & Acquisition) deal involves merging or being acquired by another business, typically one that operates in the same or a similar sector.

Pros:

• Can lead to a profitable exit, especially in a competitive market.
• Can allow for partial or complete exit.
• Provides an opportunity for business expansion if the acquiring company has resources and expertise.

Cons:

• Negotiations can be time-consuming and complex.
• Could result in clashes of corporate cultures.
• Employees may face uncertainty which could impact morale.

M&A deals can be ideal for SMEs seeking to leverage the resources of a larger entity. However, careful planning is crucial to align company cultures and manage employee expectations.

 

Selling Your Stake to A Partner or Investor

This strategy involves selling your business or a part of it to a partner, investor or another company.

Pros:

 

• Potential for a quick and relatively straightforward process.
• Allows for a full exit or retention of a minor stake.
• Can ensure business continuity with a partner who knows the business.

Cons:

• Valuation disagreements may arise.
• Potential buyers might lack the necessary funds.
• May need to offer financing or accept payments over time.

For SMEs with a willing and capable buyer, selling to a partner or investor can be an efficient way to exit. Still, it's essential to ensure an agreed valuation and payment terms.

 

Family Succession

Family succession involves passing on your business to a family member.

Pros:

• Ensures the continuation of your business legacy.
• Easier transition due to familiarity with the business.
• Can offer a sense of personal satisfaction.

Cons:

• Can lead to family disputes and strained relationships.
• The chosen successor may lack interest or necessary skills.
• Often results in a slow payout process.

For SMEs that are family-oriented and have capable successors, this strategy can be fulfilling. However, open communication and careful planning are crucial to prevent potential issues.

 

Acquihires

An acquihire is when a larger company acquires a smaller one primarily for its talent, rather than its products or services.

Pros:

• Provides an opportunity for the team to work on new and possibly larger projects.
• Can be a fast exit strategy.
• Offers employees stable employment prospects.

Cons:

• Original product or service may be discontinued.
• The company’s identity may be lost.
• May lead to staff dissatisfaction if the acquiring company’s culture is a poor fit.

For SMEs with a talented team but struggling products, acquihires could be a valid exit. It is vital to ensure the team's alignment with the acquiring company's culture.

 

Management and Employee Ownership Trusts

Here, you sell your business to your employees or management team, often through an Employee Ownership Trust.

Pros:

• Maintains company culture and operations.
• This can result in highly motivated employees.
• Potentially smooth transition as the new owners are familiar with the business.

Cons:

• Employees may lack the necessary funds to purchase.
• This can create a potential conflict between management and employees.
• Financing options can be complex.

For SMEs with a committed and capable workforce, this strategy can be advantageous, as it promotes continuity and employee motivation. Nevertheless, the financing structure and potential conflicts must be managed.

 

Initial Public Offering (IPO)

An IPO involves offering shares of your company to the public on a stock exchange.

Pros:

• Can generate significant capital.
• Raises company's profile.
• Provides a path to liquidity for shareholders.

Cons:

• High costs and time-consuming due to regulatory requirements.
• Requires ongoing public financial reporting.
• Could result in loss of control and increased scrutiny.

While an IPO can raise substantial capital, SMEs need to weigh this against the associated costs, loss of privacy and added compliance requirements.

 

Liquidation

Liquidation involves selling all company assets, paying off debts, and closing the business.

Pros:

• Simple and quick process.
• Can be suitable if the business has no viable future.
• Minimal legal implications.

Cons:

• Often results in job losses.
• Could damage reputations.
• Typically, the least profitable exit strategy.

While liquidation is a straightforward option, it's typically a last resort for SMEs due to its impact on employees and potential damage to the owner's reputation.

 

Bankruptcy

Bankruptcy involves legally declaring that the business cannot pay its debts.

Pros:

• Legal protection from creditors.
• Can lead to debt discharge.
• Provides a clean slate to start over.

Cons:

• Severe impact on credit score.
• Public record of bankruptcy.
• Loss of assets and potential legal implications.

Bankruptcy should be a last resort for SMEs. It can provide relief from overwhelming debt but at the cost of severe credit implications and potential loss of personal assets.

 

The Best Business Exit Strategy

Ultimately, most business exit strategies have their unique set of pros and cons, and the right one depends on the specific circumstances of your SME. Evoke Management's experienced team can guide you through these complexities, providing expert advice tailored to your unique situation.

Our dedicated team of part-time finance directors, CFOs, and commercial directors is here to ensure that your business exit strategy aligns with your goals and provides the best possible outcome for your SME. Remember, the success of your exit strategy lies in meticulous planning and expert guidance.

Reach out to us via our Contact page to help you prepare and navigate this crucial journey.