Much has been written, and continues to be written, about business start-ups. In contrast, very little has been written about business exit strategies and few owner-managers seem to give this matter any thought until circumstances force them to react, by which time some of their earlier options may no longer be available. If you are the sole owner-manager, deciding which your best option is, might not be too difficult, but what if you have co-owner-managers and share the business equity?
In developing a business exit strategy it is important to reflect on a number of issues:
Do I have anything to sell?
Potential buyers might well be interested in your inventory of assets but they are more likely to be interested in your customer base. If you have developed your business around a person, customer loyalty may be to that person rather than the brand, and if that person goes, so does a proportion of the customers. Ensuring, as far as possible, that clients and customers develop a loyalty to the brand rather than a particular person, enhances the value of the business.
If you are providing goods or services under contract or licence to a proprietary brand, does the agreement allow you to sell your interest to a third party? If not, what have you to sell?
Does the exit strategy take account of differing personal circumstances?
Four experienced managers working for a very large PLC joined together to make a management buy-out of an area of operations that fell outside of the PLC’s core area of activities. Ten years later they had built up the business considerably when they received an unexpected and very attractive offer to buy the business. Two of the directors wanted to accept as they saw this funding a very comfortable retirement. The other two, who were materially younger, did not as they had ambitions for the further development of the business. With no provision in the Company’s constitution for this eventuality and the banking crisis creating difficulties for the younger two to raise the funding to buy out their co-directors, they not only lost the offer but were faced with differences of interest in their boardroom which have taken some time to resolve.
Whilst it might not be possible to anticipate every possible scenario, planning ahead as to how to manage differing personal needs before they become contentious, can make the eventual decision making simpler.
Does my exit strategy contain contingency provisions?
Six years ago one of our clients started a new business. He had no particular empathy for what the business did, but was completely convinced that he could build it up quickly to such a size that it would be an irritant to a major player in this highly specialised sector, who would then buy him out. He had little idea how big he would have to grow before his business became an irritant or what he would do if he did not succeed.
Although he made a great start and now has a viable and profitable business he does not really want, he has not attracted any offers from major companies in the sector nor from anyone interested in moving into that sector.
Having a clear exit strategy is a positive step but matters do not always turn out as anticipated. Considering in advance all the realistic possibilities and planning options for addressing them can avoid being trapped in an unwanted position.
Selling or inheriting?
To many owner-managers the thought of leaving the business they have worked so hard to build, to their sons or daughters, is highly attractive. However, this view is not always reciprocated by the offspring, not all of which will have the drive and acumen to succeed in business. Failing to recognise, accept and plan pragmatically can often have unfortunate consequences.
One of our clients built up a highly successful civil engineering business and employed his four sons in practical operations within the business. Whilst all were very good at what they did, none had any real interest in managing the business. Although the father was aware of this, when he had to retire due to ill health, he gifted his interest in the business to his sons in equal shares. Recognising their lack of interest and skills in managing the business, the sons appointed a general manager, but this did not stop them disagreeing with the general manager and interfering with his decisions. Within two years the business had gone into liquidation.
It may not be possible to plan for all eventualities but having a considered business exit strategy which takes account of ensuring you have something to sell, the differing interests of stakeholder, contingencies and succession, will help you avoid many of the common pitfalls.
