5 Key Indicators of a Good Exit Strategy

Your exit strategy may provide for sale within the next 5 or 25 years, a sale may be imminent, or you may want to pass your business on to your children. But whatever stage you’re at, are you confident that your exit strategy will pass muster?

Unless you’re a serial entrepreneur (and possibly even then too), your exit strategy is likely to be one of the most important aspects of your business and one you should work on from the outset on an ongoing basis. So, when did you last take advice on your exit strategy, how thorough is it and have you really considered all of your options?

1. A specific and clear plan

An exit strategy that simply provides for a sale or buy out in the future is not nearly specific enough. You need to make some early decisions about precise timing, what you want to get out of it and why and how much risk you’re willing to take.

If you’re at an early stage of your strategy, get an idea of the current and anticipated value of your business to help shape your ambitions. It’s also a good idea to look at the more personal side of the business and what you want to happen to it, thereby ensuring that you don’t get overly attached to it or distracted when the time to sell or move on comes.

Setting your targets early will help ensure that you don’t take out excessive or premature profits or run into loss and it will also enable you to start planning your personal finances for the longer term too. Identify key professionals such as tax specialists, accountants and corporate finance advisors, etc. early on so they can help you to continue to develop your strategy and are ready to act should the need arise. 

2. Careful consideration of all exit strategy options 

There are numerous options available when it comes to exit strategy and it’s sensible to take advice about the future financial and tax implications of all of them before you decide on the right strategy for you. The path that you choose will affect the amount you get now, and in the future, and very likely your retirement and any legacy you choose to leave too. Don’t just assume that one particular option is the only path available.  Your options may include:

• Family takeover
• Management buy out
• Management buy in
• Trade Sale
• Open Market Sale
• Liquidation

3. A stellar valuation

Central to an exit strategy is, of course, the business valuation. Arriving at a realistic figure is often described as both an art and a science. Necessitating professional input, a stellar valuation is about much more than annual accounts and balance sheets. Your valuation will ultimately depend on your cash flow and the appropriate multiple to apply to that. What that multiple is will depend on many internal and external factors which will include your expected profitability, your risk profile, market conditions as well as your management, infrastructure, product range and brand awareness. You’ll need both effective cash flow analysis of years past and forward projections to substantiate your figures.

How you structure your sale can also be a deciding factor, particularly if there’s a difference in perception about value and you’ll need a skilled negotiator when it comes to agreeing that.

Being sale ready

The timing of the sale of your business can make a significant difference to the value and ultimately the deal you achieve. In order to take advantage of all (possibly unexpected) opportunities, such as an industry boom or surprise buyer, or changes in the tax regime, you need to be ready for sale at all times.  As an at a glance guide, how prepared are you really in the following areas:

• Management. Is your management incentivised with established processes and strong leadership? 
• Plans for growth and forecast. Can you demonstrate a proven track record and strong evidence to support any forecasts?
• Will you pass due diligence? Is your IP secure and if needs be, appropriately registered? What shape is your client base in – nice and diverse to minimise risk?
• Shareholders. Have you got or do you need a shareholder’s agreement in place? 

Structuring and tax planning

Concurrent to any exit strategy should be careful consideration and planning when it comes to the financial structure of your business. The main driver behind this is tax minimisation, but buyer appeal, security against risk and personal planning all have their role to play. If you took advice on this 5, 10 or 20 years ago when you started your business, you should seek advice again now to make sure it remains in line with current tax legislation and efficiencies. You want to be sure that you are in a position to take full advantage of any tax opportunities and have carried out some post sale tax planning too.

A well-planned exit strategy isn’t just about securing your future. It should also be an important factor when it comes to the day to day running of your business. Neither is it written in stone, and a stale, poorly thought out or neglected exit strategy isn’t going to achieve the outcome you want or deserve from your business.

If you do nothing else before the end of the year, revisit your exit strategy and make sure that your business is up to scratch and will deliver what you want, when you need it to do so.