Leave the Door Open for an Exit Strategy

Alan Kaplan
SME owners start a business for many reasons. For some, the financial potential is the primary motivator, whilst for others lifestyle, or a passion for a particular activity, may be the primary driver. Many, particularly in these times, start a business because they are unable to find suitable employment.

Whilst some SME owners appreciate the need for a strategic business plan, many do not include a business exit strategy, which is myopic.

Ideally an exit strategy should form part of a business strategy and plan from the outset, with the understanding that this be modified as circumstances change. In this way the framework and discipline of the process is in place from the beginning, which is highly advantageous.

In addition to the peace of mind that comes from having an exit strategy there are other advantages of having one. These include:

• Assisting to formulate the direction a business takes from inception. For example,
should the business be run as a lifestyle company whereby the owner takes
as much money as possible by way of salary and perks, or should more be left in the
company to help build it?

• Determining the corporate structure to minimise the impact of tax and optimise cash flow and asset distribution

• Helping owners calculate, work towards, and acquire the level of income they require on leaving.

• Establishing whether or not a business owner will use a consultant to assess and help build the business well before they exit and appoint a broker to sell.

• Assisting with the planning of, and preparing for, due diligence and creating a smooth transition for all relevant stakeholders

• Establishing the method and duration of payment. For example, will payment be cash or deferred?

• Leaving the business at a time and under circumstances, such as market conditions, that best suit the seller and help owners determine whether or not they are prepared to remain in the business for a transitional period under new ownership and/or retain some equity, given the choice.
The optimal exit strategy that SME’s should choose depends on the owner’s objectives and the prevailing circumstances. Each option has different consequences which should be carefully weighed. Following are some examples of different exit strategies to guide your thinking.

1. Keeping the business in the family is good for those who want their legacy continued or want to have an on-going ‘say’ in the firm even if they are no longer work there. The downside is that sometimes family members do not have the talent or motivation to do justice to the business and conflict may manifest.

2. Liquidating the assets of the business is only viable if there are assets of consequence that are saleable and there is a meaningful balance remaining once creditors have been paid. This is, however, often not the best outcome if the business can rather be enhanced by adding sufficient value to attract a buyer.

3. Selling your business to management and/or other shareholders can be a win- win situation. Not only does management have relevant experience but they will feel that they are being rewarded for their efforts and are usually prepared to put more effort in under these circumstances. As part of the exit planning process an Employee Share Ownership Plan (ESOP) can be established, preferably with the help of a professional.

4. Selling a business on the open market is probably the most common way for SME owners to exit. Preparing your business as best possible prior to the sale and utilising professionals to value and sell the enterprise will provide an excellent opportunity to acquire the best price and terms of sale. A valuation should take both tangible and non tangible assets (such as trade marks, patents and other intellectual property) into account

5. Targeting another business to purchase your company can be highly advantageous. Acquisitions occur not only on the basis of current and future earning potential but also to help others fulfil strategic objectives.

Businesses acquire others for many reasons and if you are able to identify the nature of the strategic benefits that the potential buyer seeks to derive and quantify these, this will greatly enhance your leverage. Market intelligence is essential and a useful tactic is to target and put out ‘feelers’ to potential purchasers some time before you wish to exit. A business strategist could direct this process.

6. An initial public offering (IPO) can be extremely lucrative but is only feasible if the company has an excellent business model with outstanding growth potential and is able to satisfy rigorous financial and legal criteria, which relatively few SME’s can.

In addition, SME’s will require the financial resources and a strong professional
team to expertly prepare the detailed strategic business plan, prospectus and
other documents required. Business owners should take into account the time
they will need to spend with the company following a successful IPO before
they are able to leave.

Deciding when and how to exit a business is of major consequence in the lives of SME owners. A properly constituted and planned exit strategy is of immense value in helping to attain the best possible outcomes when the time comes to leave their business. If you don’t have an exit strategy in place it is best to formulate one as soon as possible. Utilising professionals to assist with the process is highly recommended.

Should you be interested in learning more about exit strategies and planning or areas related to company growth and development, we would be glad to assist.

About the writer

Alan Kaplan PhD has international experience spanning more than twenty five years across academic, media, agency, client and consulting areas. Alan’s profile can be viewed on LinkedIn and he can be contacted on 041875855.

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Alan Kaplan © 2012

This article is for general information and the reader should seek specific expert advice before taking any action.