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As a business owner, you will inevitably face the question – ‘what’s next for your company?’ And whether that’s because you’re considering retirement, exploring new opportunities, or wanting to ensure the long-term success of something you’ve worked so hard on, having a clear business exit strategy is essential.
In this article, Mark Smith, Corporate Finance Director at Scrutton Bland explores what a business exit strategy is, why you need one, what to consider when planning your exit and how ultimately how an exit might be achieved.
What is a business exit strategy?
Put simply, a business exit strategy is a plan that outlines how a business owner intends to eventually exit their company. And the best time to be thinking about this is actually around 3 to 5 years ahead of when you plan to leave.
By deciding ahead on the best way to either sell or transfer ownership, a business exit plan is crucial to realise the value of your business and to make sure you’re in the best position possible when the time comes to step away.
Who needs one?
Every business owner needs an exit strategy. Unless you’re a firm believer in Cryonics you won’t be around forever, so eventually an exit will happen.
Whilst age and health are inevitably key drivers here, in many cases there will be other – arguably more important – things that can drive your exit, like a change in personal circumstances or market conditions, an opportunity to pursue something new, or a chance to see the business continue to flourish in the future.
So, should you stay, or should you go now?
Often, it’s about whether you still have the drive to keep going.
We all have bad days but if, to put it bluntly, you are not sure how long you can continue in your current role then it probably is time to start considering your exit.
The issue with this scenario, is that you really want to be planning your exit whilst you still have the drive and the enthusiasm to profitably grow the business.
A sales process can be long, with a challenging due diligence process. Aside from perhaps a more obvious tail off of revenue growth or a falling order book, a buyer will read you (not quite Uri Geller but it might feel like it) and pick up that you’ve had enough and just want out.
Not the optimum position for a seller to be in.
Cash is another important reason why you might decide it’s time to look for an exit.
Football managers are known to leave a club on the basis of ‘I’ve taken this team as far as I can’. And as a business owner you might be in a similar position.
Perhaps the factory is at full capacity, working on double shifts and you’re at the point where you need to recruit some people into the management team.
To continue to grow as you have historically you might need to move premises, employ 3 more members of staff and perhaps open up a facility overseas.
All of which needs cash – that you don’t have ready access to.
Coupled with not feeling convinced you have the drive to see this through alone…not the best timing.
But it’s common and workable – we live in the real world after all.
What types of business exit strategies are there?
There can be several choices available to business owners looking to exit. Each comes with its own set of pros and cons so it’s important to weigh up everything carefully before deciding.
Sale with an immediate exit
A sale with an immediate or scheduled exit, is what the majority of business owners are looking to achieve, noting that usually an exit will come with some form of contracted handover or a consultancy agreement for a maximum of 12 months.
The pros of this are that you’ll have exited the business with a lump sum of cash – noting that some of the consideration may be deferred. And you’re now free to do as you please with your time.
The cons? Having sold your shareholding, you have no further interest in, or control over, the business. If the new owners decide to rebrand, lay off staff or change location you’ll have no say in it. Inevitably with a sale, the business that you nurtured and built up will change, and some owners can struggle to comprehend this.
Also, if it’s obvious that you really want an immediate exit, the buyer is likely to pick this up, and possibly look to price cheap as the deal looks to conclude. The sales process can be stressful to the seller too – more so if you don’t appoint the appropriate professional advisers.
Management buyout
If the business is of a reasonable size, it’s likely that there’ll be a management team in place supporting the owners and who may well be enthusiastic about the opportunity of becoming shareholders in the business in which they work.
The pros? This might feel like a nice thing to do – it’s not pound notes but you might get a warm glow when you hand over the keys. The transaction should be quicker – the management team will know the business – so the scope of any due diligence should be reduced when compared to a sale to a third party.
The cons. The management team might be a nice group of people – but do they have the skills to run the business? You’ll need to make this assessment as the seller, and it’s important because ordinarily you’ll then be reliant on the management team to continue to generate the cash required for you to be paid for your shares post completion.
Sale to an Employee Ownership Trust “EOT”
This is very similar to a management buyout – other than an EOT benefits all employees, not just the management team.
There are currently tax advantages of EOT’s that you can read more about here Employee Ownership Trusts: Tax Rules and HMRC Consultation . But there are pitfalls to avoid too that you can read about here EOTs – Where can they go wrong?
Or something different…?
I’m a firm believer that until you sell, you are in control – it’s your business and therefore you do what you like with it.
So, for example, you could sell a stake in your business and retain an interest in the share capital and therefore benefit from any future growth (or conversely bear the risk if the business takes a turn for the worse).
Equally you might structure the deal with an earn out – so again part of the consideration is based on the future success of the business.
The pros are that you’re not selling everything. You’ll still be involved in the business and have a level of influence if you remain a director. If the business thrives, you’ll continue to benefit from the company and your remaining shareholding may increase in value. You’re also not going from 100% to 0% overnight – instead perhaps going down to 2 days a week instead of a complete cliff edge change.
There are of course cons to this too. It will be a more complicated route, so more expensive in terms of professional fees. Any buyer will want at least 51% to ensure that they have control – so you’ll have input but not control. And although you’ll still have a financial interest in the business, without control, for many, this is a risk not worth taking. The biggest con is that if you hold a minority stake then you will eventually need to sell that stake and unless sold to the majority shareholder, minority shareholdings are difficult to dispose of.
Getting the ball rolling
As part of my role here at Scrutton Bland I’ve dealt with a number of business sales, some of which have been long standing family businesses – which almost certainly always make the decision to sell harder.
But in each of these cases, we’ve started with an initial no fee discussion (if you’ll excuse the plug) with the shareholders to talk them through the disposal process.
I find that many business sale agents will offer overly optimistic assessments, promising quick results. However, as someone who values honesty – those that know me will tell you that amongst other characteristics I am honest, if not occasionally a little blunt and grumpy – but I believe in setting realistic expectations. As my Mum would have said – and I can hear her now – “I am a realist not a pessimist my dear”.
My point is that any decision to look for an exit can be scary – in the majority of instances these are once in a lifetime decisions. So, this is a very real conversation to be had.
The best advice I can give you is to allow plenty of time – there’s a lot to consider.
There’s nothing to lose by having an initial discussion. We can talk through how the disposal process might work, the likely timescales, who else will need to be involved, and by the end of the meeting we’ll have explored whether this is the right course of action for you.
Plus, by the end of the meeting we’ll have decided on timing – because in every business a disposal or transfer of ownership will happen – that’s how value is realised.
What I will say is that it might all take a little longer than you’d thought, but you’ll have more certainty and therefore control over your future exit.
Next steps
Planning a business exit strategy can be daunting, but it’s essential to protect your financial future as well as the longevity of a business you’ve worked hard to build. Whether you’re looking to sell to a third party, merge with another company, or pass the business to a family member, taking action early and seeking professional advice is key.
If you’re considering a business exit strategy in 2025, then now is the time to start the conversation. At Scrutton Bland, we’ll help guide you through the entire process. To arrange a no-fee initial chat, contact Mark or one of the Corporate Finance team on 0330 058 6559 or by emailing hello@scruttonbland.co.uk
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