The vital importance of a business exit strategy
We are often asked by clients when is the right time to start planning their exit from their small business. Our answer is – the day you open. Starting, leaving and transferring a business is complex and there are many things to consider in formulating an exit strategy.
In this article, we focus on something that very few people think about when they are starting a business – getting out of that business.
What is exit planning?
Exit planning is about having some control over how and when you leave your business and what happens after that. A solid plan is essential to ensure your business continues on successfully.
There are many things to consider in selling your business, and if you want to achieve certain objectives – such as maximising profit, or ensuring your business is passed on to family members – you need to make sure you have your business exit strategy in place.
Unfortunately, life circumstances sometimes mean that the timing of selling your business might be taken out of your hands and you may be pushed into selling before you are ready.
We see this happen to clients who suddenly become unwell, unexpectedly experience financial difficulties, or experience a change in life circumstances that means they can no longer continue to run or own their business.
Why is an exit strategy important?
As none of us knows what is around the corner, it is critical that your business is in the best position possible to sell at any time, and that you are clear about your goals from the very start.
This is why we encourage business owners to start thinking about succession planning and/or exiting even while the business is running well and you have no thought of leaving it in the foreseeable future.
Not planning ahead for your exit by having a strategy in place can result in disagreements with other owners over ownership, leadership or future directions for the business when you want to leave.
It can also result in you or your family being left less well off financially than you may have been if you had had a solid exit strategy.
This can happen in scenarios such as if you are rushed into accepting a first or early offer to buy your business, or because some buyers – particularly family or staff – might want to pay the purchase price over several years from business profits.
There may also be the danger – if you are suddenly needing to sell the business quickly – that you will be unable to find a buyer and the business will need to be wound up.
How to plan your exit strategy
There are many things to consider in an exit strategy. Some of the things you may want to think about include:
- Will you be selling the whole business, or shares in the company, or just the name/assets etc?
- Who will you sell to and who will own the business?
- Who will run the business?
- How can you optimise the value of your business before the sale?
- What is the business worth?
You should also carefully consider different scenarios or things that could go wrong, and include them in your exit plan.
Case study #1 – Transferring access to IT systems
Something we often suggest to clients who are considering selling their business is the transition period between selling and the new owner taking over. Some businesses are paper based, with everything documented in hard copy, while others have everything locked in their IT systems.
How you are going to give the new owner access to the information they require, and who will pay for the time or work involved in doing that?
We have seen situations where new owners have had to invest a lot of money in IT consultants to access information where this has not been considered during the sale.
Selling your business to partners, employees, family members or outside buyers
Deciding whether you will sell the business or transfer it to your heirs through a succession plan is another key decision to make. If you are selling it, are you wanting to sell it to your business partners, to an employee or group of employees, to a family member, or to an outside buyer?
Regardless of who you are selling to, the buyer may need or want you to stay involved in the business for some time giving advice. If so, it would be wise to negotiate a consulting fee and ensure you spell out how long this lasts before you depart.
If family is taking over, it is critical to make sure everything is laid out clearly and the succession is fair. Engaging with family early on the plans will help prepare everyone and hopefully ensure everyone is on the same page.
Many transferrals of business ownership involving family end up in tension or conflict among children, spouses and siblings. Similarly, there is nothing worse than forcing a family member to take over a business when they do not want to.
Help is available if circumstances force you to sell
If you have not developed an exit strategy and events force you to sell, or you failed to consider a circumstance in your exit strategy that has suddenly arisen, it is important to speak to someone as soon as possible.
This may be your lawyer, business adviser or a government organisation. There is help available to assist you in selling your business, or working out a way for the business to continue in the interim while a buyer or other options are sought and found.
We have seen many businesses fail and go under that may have been saved had the owner(s) or director(s) sought help earlier.
Case study #2 – Don’t be afraid to ask for help
A First Nations people’s organisation that we assisted was in disarray – a new person was taking over, and the employees were unhappy and leaving. There was no one left to do the work, and those who remained were not being paid. The organisation ended up being sued and finally sought legal assistance.
We were able to put them in contact with a government organisation that assists First Nations people. They sent someone to restructure the business and it was able to keep functioning. There are services available to help businesses – it is often just a matter of asking for help.
Dangers of running a business in isolation
In many cases the trouble has arisen because the owner had been running the business in isolation and there was no one with the information, knowledge or client relationships ready to step in when the owner was suddenly incapacitated.
While there is an obvious cost involved, having someone back you up and be across all aspects of the business is invaluable if something catastrophic occurs.
Case study #3 – Don’t leave it too late before taking action
The owner of a law firm who managed all aspects of the business, including the client relationships, had a heart attack and was unable to do any work. His second-in-charge, who was young and fairly inexperienced, had to assume all responsibility and worked around the clock trying to manage the business. He ended up having a breakdown due to the stress.
The firm was in real trouble, with lawyers not turning up to court and costs orders being made against them due to this. Finally, the firm was taken over by another law firm, which agreed to pay the costs orders as part of the sale.
Had the owner sought assistance earlier from the other law firm, they would have been able to step in and help with the workload sooner.
Importance of legally sound documentation
At the end of the day, when you are running a business, it is crucial that you have legally sound documentation in place for an exit strategy, regardless of whether it is a sale or a succession.
Like starting or running a business, selling a business is complex. It deserves forethought and professional advice.
An experienced business adviser or lawyer will ensure all your bases are covered with your exit plan, that you are protected and that your business is in the best possible position to sell – whenever that time may be.
More help with creating a business or farm exit strategy
Please see our other articles for further information.