Exit Strategies Explained

Regardless of the success of your business, it is important to include an exit strategy within your business plan – even if the thought of handing over the reins of your business feels very premature. Having a strategy in place early on not only helps you make decisions that will support your growth or help limit your losses, but it gives potential investors insight into the long-term goals for the organisation, and the potential profitability.

In simple terms, a business exit strategy covers the plan for the owner of the company to either sell or reduce their share of ownership, either to investors or another business. Exit strategies can be implemented for a number of reasons, both positive and negative, including retirement or damage limitation if the company is in trouble financially. It may also be used by investors in order to plan for a cashing-out on an investment. 

The most appropriate or best exit strategy is very much dependent on the size and type of the company, and how much involvement the owner would like to have once the exit strategy is implemented, if any at all. For organisations that have multiple owners, or a board of decision makers, all stakeholder’s interests should be factored into the type of exit strategy that is chosen. When writing an exit strategy into your business plan, you should consider key influences such as the business structure, competitors, the anticipated lifecycle of your business, and its profitability as well as factors that contribute to its uniqueness.

Exit strategies can take a range of shape and sizes, but the most common strategies include: 

Merger

In its simplest form, a merger combines two businesses into one. This is a popular choice for companies that are looking to increase their value, as investors can see the benefit of combining the skills and expertise of two businesses into one, potentially creating economies of scale, reducing competition or leveraging increased market share. There are a number of different merger models available, including horizontal integration (where both businesses are in the same industry), vertical (where both businesses are part of the same supply chain) and conglomerate (for businesses that may have nothing obvious in common). 

A merger is the only a viable exit strategy for owners who want to retain some control or interest in the business short of full control; so, if you are looking to step away from the company, an acquisition may be a better strategy for you.

Acquisition 

An acquisition ordinarily covers the purchase of one company by another, with the owner handing over all of their responsibilities within the organisation to the purchaser.   It can also include the disposal to a third party of all or a significant part of a company’s business, in which case it has similar implications for that part only.

One of the benefits of an acquisition is that you have some control over the price achieved for the business, and in some cases, the investor may be willing to pay a higher price than the actual value – particularly in cases where the businesses share supply chains or compete in the same industry, as that can achieve economies of scale or improve market dominance.

There are generally two types of acquisition model: “friendly” and “hostile”. If acquisition is your preferred exit strategy, your acquisition should be friendly – this ultimately means that you agree to be acquired and the key stakeholders agree to the deal on the table. A hostile takeover is rare in the owner-managed sector and is more familiar in relation to listed companies where a significant proportion of the existing shareholders and/or the management team oppose the terms of the acquisition, leading to potential unrest within the organisation.

Liquidation

Another common exit strategy is liquidation, where all company assets are sold and the business ceases to trade. This is a common strategy for companies who are either in financial difficulty (allowing the business to close without necessarily repaying all of its liabilities but also without any return to shareholders of their investments), or companies whose activities have reached a natural conclusion, possibly following the acquisition of its assets or business.  These processes are respectively referred to as Insolvent Liquidation or Creditors Voluntary Liquidation (CVL) and Solvent Liquidation or Members Voluntary Liquidation (MVL).

Depending upon how much cash there is in your company, using a Members Voluntary Liquidation (MVL) could be the most tax-efficient way and save you thousands of pounds. By using an MVL the funds to be distributed are subject to Capital Gains Tax, rather than Income Tax. If you qualify for Entrepreneur Relief, (ER) you can benefit from a 10% marginal rate on distributions. This means there can be considerable tax savings for the director(s) of the company.

IPO

An Initial Public Offering (IPO) covers the sale of shares of a business to the public. IPOs are a potentially good target strategy for smaller businesses going through a high growth phase, as it can raise funds while allowing the original owners to retain significant control, compared to some of the other exit strategies available. 

Within an IPO, the owner gets potential access to investment from public investors, including private individuals, Venture Capitalists (VCs) and portfolio investors such as pension fund managers, to raise capital.  Very small organisations may not benefit from taking part in an IPO, as it requires a significant investment of both time and money to ‘go public’ and the process is very heavily regulated.

Management buy-out 

Another potential exit strategy is a management buy-out, where people already working within the company buy it from you. As they are already within the company, they are well-placed to understand and share the wider objectives and goals of its original owners. Management buyouts therefore tend to be a smoother process than negotiating with third parties.

This option is a good strategy for those who still want to retain some involvement in the company, even from a nostalgic perspective, and your existing relationships with customers and suppliers as well as the new owners may mean they want you to remain involved in some capacity, perhaps for a pre-determined period of time.

This strategy is very dependent on having employees in your organisation that would be willing to take part in a buy-out, and if this is your preferred method of exiting your business, it is something that you should be considering as an integral part of your recruitment strategy when hiring senior members of staff moving forward.  It is also important to encourage a culture of self-improvement or Continuous Professional Development (CPD) within your personnel if you hope to ease yourself into retirement from the business.

Ultimately, the best exit strategies can all be described as planned redundancy; the purpose being to maximise and extract the value to you (however you choose to measure it) of the money, time, expertise and effort that you have invested in the business.

If you need support or advice on which exit strategy would be best for your company or want to start the motions on implementing an exit strategy, our team of experts are available to help.