A business exit strategy is a business owner’s plan to sell all or part of their business to investors, or to be part of a takeover from a larger company. Alternatively, for less successful businesses, an exit strategy is the plan to close down a business and minimise the losses and it could include going into bankruptcy.
If your business has been making a profit or has a proven track record that shows it could easily generate profits again with the right business plans and the right management, then your business could be an attractive option for investors looking to go into business in your industry.
Having a good business exit strategy will ensure that you get the maximum amount of money for your business, so make sure you spend enough time to prepare a really comprehensive exit strategy. The best time to sell your business is when it is making peak profit, so you must be careful not to take your eye off the ball and let parts of your business strategy slip in the lead up to the sale.
Different types of exit strategies
There are lots of different ways that business owners transfer ownership, this could be by having a family member take over the business, or it could be a strategic acquisition, initial public offerings, or a management buyout.
It may be that the owner wants to continue to have some input in the company and keep some shares, so that will influence the type of exit strategy to go for.
A strategic acquisition would mean that the owner completely relinquishes all involvement with the business, but this can be perfect for those who want to retire or move onto a completely new project.
The type of exit strategy will depend on the specific circumstances, including how profitable/attractive an investment it is, how quickly the owner wants to exit and how much they want to hold out for in the sale.
When you are selling a business on the open market, you should make sure that your business is as attractive as possible to buyers, including which assets are included and the amount of effort you put into making sure that business handover will go smoothly.
You should get a valuation of your business before you start talking to potential investors, so that you know exactly how much you should be pitching at and you don’t undersell your business. Remember, the valuation does not just take into account your monthly profits, it includes assets, reputation, quality of employees, how well set up your business is for the future and how agile it is if it needs to adapt to changes in the market.
Preparing for an exit strategy
It will be important to have your books in good shape, so that potential investors can clearly see your income and outgoings. The other really crucial aspect to preparing your business for an exit strategy is to have all of your business processes recorded so that a new owner will be able to easily pick up where you left off.
For larger businesses, you might have a large number of employees that will be continuing in their roles, so the new owner doesn’t need to have the granular level of the processes. However, if the new owner is going to be hands-on and will be working within the company, they will want to know everything about your business and how you currently run things. If you have assets that you can sell for more money than they would probably get valued at as part of the business, sell them and help the books to look more attractive.
When you are getting your accounts together, investors are likely to want to see a prolonged period of operating profit, not just the recent months’ accounts. So, make sure you have at least two years’ of accounts to show investors.
Depending on the type of exit strategy you are trying to achieve, you may need to present a pitch to investors to persuade them to invest in your business, or if you have several interested investors, your pitch will help to increase the bidding for your business.
You may simply need to send them the investor pack that details all of the relevant information regarding your business, including who your key customers are and what your unique selling points are, as well as the financials.
Recording business processes and other important details for handover
Having every detail of your business recorded and particularly the business processes, will be really important in showing investors exactly how your business operates and the more detailed and more professional your process mapping is, the more trust investors will have in a successful takeover.
This preparation work could include writing up current job descriptions, what each role is responsible for, how software or tools are operated, which different tasks take place as part of a process etc. If you are stepping out of a very active role within the company then you will need to train others up to take on the responsibilities that you had. If the business relies heavily on your input, then this could significantly hold up how long it takes to sell your business.
Therefore, it is a good idea to be planning well ahead of your exit strategy, so that you can get all of these things into place before you are ready to sell. If you have the right personnel to pass your knowledge onto, you should be doing this anyway to help your business to develop without being reliant on too much of your involvement.
Having a business exit strategy in place is a good idea even if you are not considering the possibility until some years down the line. The better you prepare for an exit, the more money you are likely to make from the sale, or in relation to unsuccessful businesses, the less money you will lose when you need to wind it up.