Planning an exit strategy for you and your business – a guide

Here’s a guide to planning an exit strategy for you and your business in the latest blog from our Commercial team.

You have worked hard, probably over many decades, to build up and grow your business. You have invested all of your time and effort into your business and hopefully you have been able to enjoy the fruits of your labour during this time.

You hope to be able to convert your business into a pension pot so you can enjoy your retirement years comfortably. We find however many business owners do not actively consider their exit strategy from the business and because of this, they take no steps to plan for an eventual sale of their business. This can impact the saleability of the business, or the value achieved from its sale. It can also create additional work at the time of the sale.

A sale of your business might take one of the following usual formats.

1. Sale to a business partner. If you run your business with a partner or a fellow director/shareholder but they are not yet ready to retire at the same time as you, then this is an obvious exit strategy. Depending on the structure of your business, it may in fact be the only realistic option available to you.

2. Sale to others within the business. There may be other junior members of staff who might be keen to buy the business from you on a ‘management buy-out’ basis. They know the business inside out and may have dedicated many years of their career to helping you to grow your business so a sale to them may seem like a really good fit, if they are ready to take that next step.

3. Sale on the open market. If there are no internal sale options, then a sale on the open market is your remaining option. This may be to a competitor wishing to acquire your customer base or a new investor looking to buy into an established business. 

Internal sale

A sale to another person already connected to your business should, in theory, be the most straightforward exit strategy. They already know a lot, if not as much, about the business as you do. Negotiations tend to focus on the price to be paid for your interest in the business and whether payment will be paid by instalments.

It is sensible to speak to someone who specialises in the valuation of businesses. There are a number of different ways of valuing a business and often this turns on the type of business you are running or the industry you are in. Getting this specialist advice early on can help you to decide the timings of when to exit your business and form the basis of your negotiations with the buyer(s).

If you have a Shareholders Agreement, you should review it to see if the agreement provides a mechanism for selling your shares and reaching an agreed valuation of your interest in the business. 

External sale

An agent is usually instructed to market your business for sale if you are selling on the open market, unless you are able to make direct approaches to possible interested buyers.

Because you are presenting your business for sale to the outside world, you should consider how appealing an acquisition of your business by a third party may be. Prior to marketing your business for sale, it can be worthwhile to conduct a review of your business to see if there are any improvements which might be made to the way in which your business is run internally and the way in which you conduct business with your customers and suppliers. Such a review may help to identify concerns which an interested buyer may have about your business and these concerns, if significant enough, may dissuade a potential buyer from proceeding or have an implication of the offer they will make to acquire your business. Your review should consider factors such as:

1. Do you have up to date contracts with your customers and suppliers? Are the contracts on favourable terms? If you do not have any written contracts, you should consider whether a buyer would prefer there to be written contracts, especially if this is typical in your industry.

2. If you rent premises for your business, review the terms of your lease to ensure you are up to date with its maintenance provisions. Consider whether a buyer is likely to need your business premises to continue trading your business from the same location, or whether there is a likelihood that buyer will not want to take on your lease. If the latter, you will need to consider how you can get out of any remaining term on your lease. This may need to be considered further if your lease term is coming up for renewal before you begin to market your business for sale.

3. Do your employees have written employment contracts? Do you have staff handbooks and procedures in place? If not, you should consider whether a buyer would prefer these documents to be in place.

4. Are your account records up to date? What is your credit control like? If you have some bad debts, consider if these should be written off or whether attempts should be made to collect in the debts before offering the business for sale.

5. If your business requires licences and permits, review these documents to make sure they are all to hand and are up to date and you are not in breach of any requirements.

6. If you are in dispute with any of your customers or suppliers consider if this might put off a prospective buyer and if so, can you try to resolve the dispute before offering your business for sale?

7. If you run a limited company, check with your accountant or whoever does your business filings that your books and records are all up to date and in order. If not, remedy any deficiencies now rather than them being found by your buyer.

By considering and addressing these types of issues before you market your business for sale you will demonstrate to prospective buyers that you have been competently running your business and this will help to create the right first impression for your business. It is worth carrying out this exercise at an early stage as resolving any issues or gaps may take time some time to achieve.

Being prepared like this can also help to streamline the sale process which in turn can help to reduce the legal costs involved in selling your business.