The importance of a planned exit strategy

For many private business owners, selling their business isn’t something that regularly plays on their mind.  When it’s full steam ahead looking after the day to day demands of running the company it’s easy to think that it’s a topic for another day, one that will take care of itself when the time comes.  However, just as you should regularly review your other financial assets, a business owner should continually revisit his/her priorities, and keep in mind that selling could be an option sooner or later than you had previously envisaged. You should regularly consider whether your commercial objectives can best be met by continued ownership of your business or sale of part or all of your business.

There are many reasons why a business may be sold.  Retirement is the most obvious one, fuelled by either a desire to stop working or to do something else, with or without the cash released from selling the business. The absence of family members to take over can be a fundamental issue and one that may not be easy to resolve.  For some, it can feel that they have reached the limit of what is possible and that the next stage of development is better to happen under ownership with deeper pockets or scalable infrastructure. Last but not least, some simply receive an offer that is too good to refuse. Selling now wasn’t part of the plan but would they get the same or better price later and is it worth the risk to wait?

Whatever the motivation, the decision to sell your business, when and to whom, is one of the most important financial decisions you will ever make.  It is perhaps surprising then that many private business owners don’t plan their exit and are not aware of the various ways in which they can dispose of their business.  Depending on the specific circumstances, there are likely to be a number of exit routes available to the owner and exit strategy planning is vital to ensure that the best outcome is achieved, both in terms of sale price and personal aspirations.

The primary exit routes available to private business owners looking to sell are:

• A third party sale (‘trade sale’);
• A management buy – in or buy – out (‘MBI’ or ‘MBO’), or a combination of the two – a buy-in management buy-out (‘BIMBO’);
• Employee ownership;
• Family succession; or
• A public flotation.

The most popular exit route in recent years has been a trade sale to a company that sees the strategic value in bringing your business into its operations.  For example, to a direct competitor, a supplier who sees a clear route to market for their own product, or a company with a comparable customer base that spies an opportunity to expand their product line. Ambitious management teams backed by supportive funders (banks and/or private equity) can provide strong competition to trade buyers, and this may feel like a safer bet for owners.  The family succession route is now becoming less prevalent with many heirs either not interested in or not capable of taking over. Employee ownership is an increasingly common exit route, especially where the business is critical to the local economy, or where the owner is particularly keen to ensure that the culture and ethos of the business is protected. Whilst a public flotation can provide access to additional capital it does not necessarily provide an immediate exit for the owners and the increased public scrutiny and regulatory requirements can be unsettling.

The choice of exit strategy adopted and the timeframe to complete can make the difference between disposing of the business at a fair price and not selling at all.  An important role for the advisor is to fully understand the key drivers for the owners, asking the important, sometimes difficult, questions in order to attain the most suitable exit strategy.  For some, the emotive aspects such as employee security and cultural fit may be just as important as financial gain.

Our experience has shown that owners who approach the sales process in a controlled and structured way are far more likely to achieve a more satisfactory result on completion of the sale.  The earlier this exercise is undertaken the more exit options that will be available and the more likely that the optimal outcome will be achieved in terms of sale price and personal aspirations.  Consideration should be given to all exit routes, as a variety of unique factors will influence the final strategy that should be adopted.

For more information please contact Lyn Calder or your usual AAB contact.