Business exit strategy
When entrepreneurs embark on their new business venture, the successful ones will typically have a solid idea, a good business plan and a well mapped out path to profitability.
But most only have the vaguest idea about how they might eventually sell their business. It may surprise you to know that the best time to start thinking about a possible exit is at the beginning.
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Broadly, owner managed small businesses fall into two groups.
The first type, frankly, is difficult to sell. These sorts of businesses, are typically just a wrapper (normally in the form of a limited company) around the skills and experience of their founder.
And the problem is, when the founder leaves, for practical purposes, the businesses ceases to exist.
Different exit plan strategies
Having an exit strategy can have many meanings and types – it doesn’t just cover the scenario of starting a business with a view to growing it to a size and value where you sell out. Types of exit can include :-
- Family business succession
- Death or serious illness
- A staggered exit based on gradual dilution of ownership starting with new investor coming in to provide growth
- A defensive exit – for example where the business starts struggling and you perhaps have given personal guarantees for borrowings
- Management buy out or buy in
- Selling parts of the business in stag in which case a group company structure might be useful from an early stage, such as intellectual property rights in a different company from other aspects of the business.
Founder dependency is problematic
Lots of businesses fall into this category. Painters, decorators, private tutors, freelancers and consultants of all types are all prone to this problem. But even businesses with several employees that rely heavily on the skills, experience or contacts of the founder have this problem too.
Max Clifford’s PR operations are a good, if slightly extreme, example of this. His business was forced to shut up shop and take down the website when his forced retirement from the business came somewhat sooner than he had hoped.
The second type of business is on safer ground when it comes to an exit. These businesses can still be owner managed, and might even still be fairly dependent on their founder, but they are sustainable in their own right. As a result they have an intrinsic value to a potential purchaser.
All is not lost for owner managers
The interesting thing here is that, actually, most businesses are somewhere on the spectrum between these extremes. And in many cases, with a bit of forward planning it is possible in most cases to move your business several notches closer to the self-sustaining end of the spectrum.
Let’s consider a property surveyor who works on his own. He looks a lot like a self-employed freelancer for the purposes of our description above.
Yet there are things he can do to make his business more saleable when he comes to retirement. The probably has a broad base of contacts - architects, estate agents, builders and property developers who regularly provide him with work.
Given enough time, he could maintain these relationships, but start to contract out this work to other (perhaps to more junior) surveyors on his payroll. With time saved by not having to carry out the surveying jobs, he might be able to further develop his professional relationships and drum up a bit more work. That might mean he now has enough work for two recently qualified surveyors.
In the interim, he’ll probably still need to review their work and schmooze the clients, but over time, he can start to extract himself. If funds permit, he could also take on a charismatic business development manager who would probably do a rather good job of drumming up new business.
And there we have it. A business that he can continue to grow, or sell as a self-sustaining bolt-on to another firm of surveyors or estate agents.
Strategic and exit planning consultants
At Accounts and Legal, we help small business owners, start, grow, plan for succession and sell their businesses. Give us a call if you’d like help at any stage of your entrepreneurial journey or get a quote for our services online now.