No business owner can go on forever and at some point they must start to focus on the future. The current economic climate means planning for that future is more vital than ever. The safety blanket of a willing pool of buyers with easy access to capital can no longer be relied upon to bail out the unprepared.
The starting point is to decide what you want and need out of the business. Will it fund your retirement during its lifetime? Or will you need a capital payout at the end? Do you want to leave a legacy, safeguard the employees, pass it on to the next generation or just let it wind down?
Only when you have answered these questions can you begin to plan what shape your business should be in order to meet your goals. No assumptions should be made when carrying out this process. Many a business owner has assumed the next generation will take over, only to find out too late that the next generation are incapable, uninterested or both!
More often than not the exit route will be by way of a sale, but work needs to be done to identify who the buyer might be. Is it likely to be a competitor, a customer, a supplier, or a business with a complementary fit? Work then needs to be done to ensure your business is attractive to such a buyer; for example, concentrating on enhancing those parts of your business such a buyer would find attractive (even if it is at the expense of short-term profit).
If a management buyout is to be the route, then you need to start grooming the management team, structuring share options to tie them into the business and motivate them towards feeling a sense of ownership.
If two aspects of what the business does would be more saleable separately, then you need to ensure those aspects are neatly and clearly divided in terms of employees, contracts, systems, etc. This may involve a formal re-organisation of your businesses structure. You also need to ensure you have the correct systems and contractual documentation in place so as to make it more appealing to a buyer.
If the business is heavily dependent on its owners and their relationship with customers, ensure those relationships can be effectively transferred (they are the goodwill of the business).
If the exit strategy is not about a sale, but about maximising profits, then make sure you are structured as tax-efficiently as possible to maximise the return from the business.
Once you are in the best shape possible and you have found your actual buyer, you will need to look at how the sale can be structured. Bank funding can no longer be relied upon in the same way it once was. It is now often only part of the answer. Realistic expectations as to price are important, as is how and when that price can be paid. Having part of the consideration deferred is increasingly common to assist with the buyer’s borrowing requirements and cash flow. The seller must, however, be comfortable with effectively leaving money in the business and the security they will receive in return.
A gradual hand-over to a management team can work for all concerned but does come with potential pitfalls in terms of tax and practicality.
The earlier you start planning the greater the chances of achieving the desired outcome. Involve your advisors at an early stage (it’s what we’re here for) and remain flexible, in the current climate there may well not be one single solution but the answer could lie in a combination of various different approaches which together achieve your goal.
