An exit strategy is something that every owner of a small business looks for. Even a one-person business still needs an exit strategy. The main questions that need to be answered are; how are you going to get your money out of the business and how much money are you going to get?
Having an exit strategy worked out in advance helps ensure that you get the right answer to your question at the right time and gives you some control over your business’s future.
For sole businesses liquation and selling the assets is normally the main option. The advantages are simplicity, and the business can be wound up very quickly. Extracting value over time helps make the most of all the profits rather than reinvesting them back into the business. This is typically done by taking a large salary or dividends. This helps boost your lifestyle, as maximizing the cash withdrawals on an ongoing basis for personal use is one way to enjoy the future windfall early.
Another option is to keep the business within the family to ensure the legacy continues. This can help with a smooth transition and allow you to keep a hand on the business in an advisory capacity. However, a word of warning. Statistics show that 60% of second-generation businesses fail and 90% of third-generation businesses fail to last the distance.
One option that is becoming more popular, not least because there are significant tax advantages, are Employee Ownership Trusts. This structure was introduced as a way of encouraging John Lewis style employee ownership arrangements by providing tax reliefs – Capital Gains Tax relief for selling shareholders and the potential for tax-free employee bonuses of up to £3,600 per year. It is now increasingly being used by business owners who want to deal with succession issues and share business profits with staff in this way. A recent example was Richer Sounds, the hi-fi and TV retailer.
The last option is to sell the business on the open market. This is the most popular option whenever people want to retire. However, it can be difficult to get the price wanted and hard to value. If this strategy is chosen, the earlier the process begins the better. At Foresight, we work with a number of consultants whose job is to create the maximum value in the run-up to the sale of that business.
We also work closely with business owners to help them establish exactly how much they need to sell the business for in order to fund their lifestyle moving forward. It is possibly less than you think, meaning that that people are often working longer and taking the risk of running a business unnecessarily.
The best exit strategy is the one that best fits your business and your personal goals. Decide first what you want to walk away with. If it is just money, an exit strategy such as selling on the open market or to another business may be the best way. If your legacy and seeing the business you built continue are important to you, then family succession or selling to employees might be the way to go.
Whichever you choose, you need to start working on it sooner rather than later. Planning gives you time to get it right and maximize your returns.
If you would like advice on how much you need your business to be worth to consider selling it or want to speak with one of our highly qualified business consultant partners, then please get in touch.