19 October 2023
In this series of articles, our experts discuss the key considerations when building a comprehensive exit plan.
First up is Antony Sassen, who weighs the pros and cons of the most popular exit routes.
Exit planning is a recurring topic in conversations with business owners. It's a complex process that demands time, strategic decision-making and advanced planning.
One of the initial and most crucial steps is determining your exit route. The most obvious option may not always be the most beneficial.
So, it's crucial to weigh up the the opportunities and challenges that come with each route, while keeping your objectives in mind.
What do you want to achieve with your exit?
Before starting the planning process and selecting your exit route, you need to establish clear goals.
What are your short, medium, and long-term objectives? Do you want to secure the highest possible value for your business, make a swift exit, preserve your legacy, or a combination of these?
Once you have a clear vision of what you want to achieve, you can begin mapping out the path to get there.
I've outlined the complexities associated with some of the most popular exit routes below. It's important to remember that these aren't the only options available to you. There are other, less conventional routes, such as share buybacks and employee ownership trusts, which could be suitable. Regardless of your choice, we recommend consulting an advisor before proceeding.
Is selling the business to an external buyer right for you?
If you run a mature business with a strong reputation and market position, a trade sale could be a viable exit option. Trade sales involve selling your assets, liabilities, and shares to an external buyer who typically operates within the same market.
Many owner-managers opt for this route because it can provide a substantial lump sum payment and a clean exit. There are always businesses looking to acquire others, which can create competition between buyers, potentially allowing you to negotiate a higher price.
However, selling to a third party has its challenges. Finding the right buyer takes time and often requires specialist support. Even after attracting a buyer, there's no guarantee that the two businesses will align culturally and strategically. Equally, there's no assurance that the sale will be finalised, potentially exposing your financial and operational information to competitors.
What about attracting an investor?
Exiting through private equity entails selling all or the majority of your shares to an investment firm. These firms aim to drive further growth in your business, eventually selling it for a higher return down the line.
If you have strong growth potential, healthy organic growth, and a secure management team, this could be the right route for you. It's less disruptive for your stakeholders, and strategic buyers may offer substantial premiums for your intangible assets. Deals usually conclude swiftly, allowing you to cash out effectively.
It's essential to note that as the owner, you'll no longer have sole decision-making authority. Your ownership may become diluted, which can lead to conflicts in decision-making.
These firms also have strict financial reporting requirements, so be prepared for a rigorous due diligence process (which we'll discuss later in this series).
Do you want to pass your legacy through family succession?
If you've built your business from the ground up or if the organisation has been in your family for generations, keeping it in the family might seem like the natural course of action.
However, this comes with its challenges. Just look at the TV series "Succession" for a glimpse of some potential drawbacks. While this may be a far-fetched example, it's important to be mindful of the sentiment surrounding family succession. There's no guarantee that your family will share the same commercial and entrepreneurial mindset as you, or that they're ready and willing to step into your shoes. There are many considerations to keep in mind, which we'll discuss in the next edition of this series.
That being said, family succession can help you retain your legacy, especially if your children or grandchildren have already worked in your business. They'll be familiar with your goals, culture, and operations, making for a smoother transition compared to external buyers. This allows you to step back with less pressure and avoid a lengthy negotiation process.
Could your team take over with a management buyout?
A management buyout (MBO) involves selling your business and its assets to your team. If your business is too small to attract an external buyer, and you have a strong management team, an MBO could be the perfect fit.
Much like family succession, an MBO allows you to pass your business to people you know and trust—individuals who understand your organisation's nuances and can preserve its brand identity. This can make negotiating the business's value easier and offers a smoother transition.
However, the route does require financial input from your team, which isn't always viable and can sometimes deter the sale. The final sale price of your business is also likely to be lower than that of an external buyer, so it's important to factor that into your future plans.
Like family succession, the success of an MBO depends on having the right team in-house. If your current team isn't suitable, now is the time to start recruiting.
Supporting You with Your Exit Plan
Choosing your exit route involves various factors, and it's crucial to consider the nuances of each option before committing to one.
Having the right advisor by your side will help you see the bigger picture. Working closely alongside you, they can provide guidance on the best course of action to build a successful exit strategy. Our team of experts works with businesses from various industries, helping them reach their goals upon exiting.
Gain an insight into their extensive knowledge with our Exit Planning Handbook to support your exit strategy today.
Author
Antony Sassen
Director
