Leaving the Door Open for an Exit Strategy

While some SME owners appreciate the need for a strategic business plan, many do not include an exit strategy.

Alan Kaplan explains why this is myopic and how you can better implement the best exit strategy for you. SME business owners start a business for many different reasons. For some, the financial potential is the primary motivator, while 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.

Ideally a business exit strategy should form part of a strategic business 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 outset, 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 out as much as possible by way of salary and perks or should more be left in thecompany 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.
  • Assisting with the planning 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 owner and helping owners determine whether or not they would remain in the business for a transitional period under new ownership and/or retain some equity, given the choice.

The nature of an exit strategy is greatly determined by the objectives of the owner and, assuming that the company is not bankrupt there are a number of options. The optimal exit strategy that SMEs should choose depends on their objectives and the prevailing circumstances. Each option has different consequences, which should be carefully weighed.

Following are some examples of exit strategies to guide your thinking.
  • Keeping the business in the family is good for those who want their legacy continued and/or an ongoing ‘say’ in the business even if they 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.
  • 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 be enhanced by adding value to attract a buyer.
  • 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.
  • 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 tangible and non-tangible assets (such as trademarks, patents and other intellectual property) into account.
  • 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 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.
  • 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 SMEs can.

In addition, SMEs 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 them 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.

Alan Kaplan, PhD, is an Executive Director of Optivance 360.

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