What Is An Exit Strategy and Why Does Your Business Need One?

If you are a business owner that’s invested time, effort, and expertise into setting up and growing your own company, an exit strategy is likely to be the last thing on your mind.

Whilst the prospect of leaving your business might seem unimaginable now, circumstances are prone to change and you may find matters that are out of your control force you to exit the business earlier than expected.

Having a proper plan in place for when you exit the business means you can get maximum value from the sale whilst also improving its chances of success under new ownership.

Our blog post looks at the importance of having an exit strategy as well as three of the most common types of exit we support our clients with.

What Is a Business Exit Strategy?

An exit strategy is a formal plan which details how you will eventually leave the business including the type of exit that will be used, it may also include some details of how the organisation should continue to operate and how much involvement (if any) you wish to have going forward.

Why Exit Strategies Matter

There are many reasons why entrepreneurs exit their businesses, the most common is retirement but other motivations include moving on to a new challenge, relocating abroad, or starting a family.

There may also be unforeseen factors that lead to an exit from the business such as industry or legislation changes, burn out and, unfortunately, ill health.

Whilst these unforeseen circumstances may never happen to you, a planned exit is significantly more beneficial than an unplanned one and having a strategy in place at the early stages will prove advantageous when you come to exit the business.

Benefits of Having an Exit Strategy

With all the responsibilities business owners have, it may initially be hard to justify the time spent developing an exit strategy. However, there are many benefits that make it worthwhile:

Gives you a clear vision for the future which can be adjusted in line with changes and progress in your business
Allows you to capitalise on the success of the business and cash in on all of your hard work, potentially supporting your future plans financially
Gives you an accurate picture of the value of your business which can support any future negotiations
Prepares you for the prospect of leaving your business in the future
Reduces the amount of work that is required when you do exit the business
Gives you some control over what happens to the business next
In the unfortunate event that the business starts losing money, an exit strategy can help minimise losses
Can help combat burnout and improve motivation as there is a plan in place for exiting the business

Types of Exit Strategy

There are several different types of business exit strategy, each with its own benefits and drawbacks; three common types of exit strategy are:

Type of Exit

Advantages

Disadvantages

Management Buyout (MBO)

An MBO is when the management team at a company acquire a majority stake of the business by buying out the existing owner.

Often simpler than other types of exit strategy.

You are handing your business over to a team you know and trust.

Given the experience of the management team, there is a higher chance of future success for the business.

Relies on the management team wanting to take on the business and having the right expertise.

Members of the management team could have disputes between themselves about how the business should be run.

Third Party Sale

A third party sale involves selling the business in its entirety to a third party, often being another business looking to grow by acquisition or an entrepreneur.

There is no shortage of buyers.

Possibility to negotiate a higher price with the new buyer.

Selling to a third party can eliminate any disputes about inheritance of the business to a family member or member(s) of staff.

Lengthy process to follow in order to make the sale official requiring support from other third parties.

Possible increase costs for Third parties.

The business could fail if the new owner is not experienced in the industry.

Employee Ownership Trust (EOT)

An EOT is a Government initiative that allows business owners to sell their shares to a trust owned by employees.

Significant tax advantages for the seller, the buyer, and the company.

Employees are likely to be more motivated to make the business a success knowing that they may one day own part of it.

Reduce reliance on third parties for a smoother and less expensive exit.

The ownership employees have is indirect.

Requires employees to want to take on ownership of the business, and have the experience and expertise to continue to mange the company

Which Exit Strategy is Best for You?

Because every business and business owner is unique, there is no one size fits all approach to exit strategies.

Based on our experience with clients running businesses of all sizes in a range of industries, Employee Ownership Trusts have proven to be a predictably successful exit strategy in most scenarios.

Passing the business on to an employee owned trust rather than a brand new owner often means a better experience for employees working at the company and can result in better performance over the long term.

Furthermore, being a government scheme aimed to promote employee ownership, EOTs come with a range of tax benefits that cannot be matched by other types of exits.

Do Small Businesses Need an Exit Strategy?

With all the time and effort it takes to set up and run a small business, most owners can never see themselves giving it up and moving on from the business, meaning they never get around to developing a cohesive exit strategy.

However, just like any other organisation, you won’t be there forever and whether planned or unplanned, there will come a time when you exit the business.

Having an exit strategy will make this process smoother and can ensure that you get the maximum value from your business before moving on.

Plan for the Future with Equifino

If your business doesn’t currently have an exit strategy, we hope that this blog post has helped you understand the importance of one and the types of exit that are commonly used by business owners.

At Equifino, we help clients plan for the future through a range of accountancy services including exit strategy planning and have the capability to perform business valuations and financial due diligence.

To find out more about how an exit strategy could benefit your business, give our team a call today on 0117 203 4010 or fill out a contact form and we will get back to you.