Leaving a business you’ve built from the ground up can be difficult, not just practically but psychologically: it’s likely you will have developed a deep emotional attachment to your business. This emotional investment might be an early brick wall in your exit, but it’s more important to think rationally and make the right financial and business decisions for you and your business.
You may have started the business with an eventual ‘cash out’ in mind, or you might just have reached the conclusion over the course of your career. There is an array of reasons for people choosing to leave the businesses they started. Once the business has matured, many owners look to take a back seat or leave altogether. You might want to sell the business to pursue other ventures as part of a wider entrepreneurial career, or you might be looking to retire altogether. Whatever the reason, for a smooth exit to take place, it’s vital to develop an ‘exit strategy’. You need to plan for this future for the sake of both your own career and the success of the business once you leave it. The purpose of an exit strategy is therefore to enable you to leave your business on your own terms.
Building a time scale and setting objectives
Establish a time-scale: think about how much longer you want to run the business day-to-day before moving on. This provides the foundations for the rest of your strategy, enabling you to set an exit date, allowing you to specify and sharpen your other plans. It will allow you to strategise on key exit points. These could include how long you need to prepare the business for sale, to set yourself up for the future through pensions, to establish an annual income or seed money for your next venture.
Returning to your timescale, you need to think about where the market could be in a few years. This highlights the importance of a contingency plan: be prepared for the possibility that your exit strategy may not go as smoothly as you’d hoped due to factors outside of your control, and develop a plan B appropriately with alternatives. You’ll thank yourself for keeping your options open if your first exit plan goes awry.
Set objectives. Where do you want your business to be after your exit? More importantly, where do you want to be after your exit? Firstly, you should decide who is going to take over the business from you. Are you going to sell the business to a third party? If so, do you need to put in extra work to increase the business’ value and make it more attractive to external investors? Alternatively, would a management buy-out work better, or simply hiring a visionary and trustworthy managing director to replace you?
These decisions will be heavily influenced by the type of business you own, but more importantly where you see yourself after the exit: are you going to set up another business, or retire? If it’s the latter, it’s worth discussing with a financial adviser to work out how much you will need to make from selling the company in order to secure an annual income, and plan accordingly. If you plan on starting a new venture, you can use personal profit from the sale to secure seed money and a provisional income to carry you through to your new start-up. (For more information on raising money for a new venture, read here.)
Preparing and managing the change in ownership and management
“These days, companies tend to be valued at four to six times EBITDA (earnings before interest, taxes, depreciation, and amortisation). In order to get the higher multiple, you need to show a history of steady growth.” – Norm Brodsky
Create Value: Managing a change in ownership can be difficult, and it doesn’t begin and end with the sale of the company. You need to prepare the company for a change in leadership before your exit, in a way that ensures a smooth transition after your departure.
If you’re aiming to sell the company to a third party, you obviously need to be able to attract potential buyers. It is therefore vital to demonstrate consistent profitability, with a steady cash flow, in order to build business value. A positive side-effect of this is that it hints at future earning potential for any buyer who wishes to scale the business further. This is something you should work into your timescale estimate: how long is it feasibly going to take to build a decent record of steady growth if the company is not already there? In your exit strategy, therefore, you aren’t necessarily looking to expand and scale more of your business, but you are looking to stabilise its profitability and make it more attractive to investors. This will, of course, require an assessment of market conditions. Assess different potential investors and see what it is they are most interested in. This should form the groundwork of how you prepare your company for sale.
You should also be prepared to manage any buy-in further down the line. A management buy-in can severely disrupt day-to-day operations of the business if poorly planned. Consider the different steps of a buy-in and management transition, and plan accordingly. This is a helpful flowchart outlining the steps of a generic management buy-in. You need to put procedures in place prior to your exit that will prepare your employees for the change, such as clearly outlining to the new management the specifics of your current day-to-day operations.
There are many different exit strategies, and only you can know which is right for you and your company. Ultimately, the most important aspect of an exit strategy is adaptability. By preparing for many different factors that could affect or even initiate your exit, you’re ensuring that you will come out on top. Preparing not only yourself, but your business as a whole for your eventual exit is what will enable your continued success, and that of the business you leave behind.