Thinking Ahead with Your Exit Plan: Key Considerations Before Exiting Your Business

Starting to think about your exit plan? For many business owners, selling is a huge, once-in-a-lifetime event. Even if selling your business feels out of reach right now, it’s best to be prepared. There are key factors to consider, such as due diligence and how your exit route will shape your plan.

However, when the day-to-day management of the business and other challenges take priority, it can be hard to find the time. But creating a long-term strategy and planning ahead can maximise the value of your business, and you can start today. Here’s our guide to thinking ahead with your exit plan.

When should business owners start planning their exit strategy?

Business owners should start planning their exit strategy in the early growth stages of the business. The exit planning institute found that around half of business owners don’t have an exit plan, and consequently rush through the process. Many founders don’t realise the scope of benefits to planning an exit strategy sooner rather than later, including getting the most out of the sale.

So, while you might be years away from exiting your business, it pays to be prepared. Not only does thinking ahead give you an understanding of how much your business will one day be worth, but it also encourages a smooth transition when the time does come.

How long does it take to exit a business?

The time it takes to exit a business depends on several factors, including the industry. According to data found by Crunchbase, SaaS companies take an average of 9 years to exit, while marketplace and social media companies take an average of 7 years to exit.

Here are four things to consider when planning your exit:

1. Undergo a business valuation

Even if you’re not planning on pulling the lever on your business exit strategy for multiple years, undergoing a business valuation is still important. Your current business valuation tells you what you would likely sell your business for if you were to sell this year. If you don’t like that number, you have time to improve what your business is worth. It’s an opportunity to make necessary and beneficial changes.

2. Consider the exit route you will take

There are several types of exit strategies. However, in general terms, a Management Buy Out (MBO) and a sale are the two main routes. Knowing which route you will take will help develop your exit plan.

• Management Buy Out (MBO)

An MBO occurs when the senior management team purchases the business from the owner. For founders with a personal attachment to their business, an MBO is a popular choice – you’re leaving the company you’ve spent years building in capable hands that you know and trust. It means that you must choose a senior management team with the capabilities to take over the business when you exit, which can make that kind of financial input.

• Sale

Typically, if you are undergoing a sale, the business will be sold to a third-party buyer. This involves choosing viable and capable new owners and agreeing upon an exit date.

3. Due diligence

Due diligence when planning a business exit involves a meticulous assessment of all aspects of your business. This ensures that you’re in the best possible position to sell. Some of the key areas to evaluate during your business exit due diligence are:

• Intellectual property: Make sure that you own all intellectual property, including copyrights, trademarks, and patents.
• Financial statements: Assess your company’s financial health by taking a deep dive into your statements, including cash flow statements, income statements, and your balance sheet.
• Compliance: You should ensure that your business is complying with legal and regulatory frameworks, from tax laws to environmental regulations.
• Potential liabilities and risks: Identify and mitigate potential liabilities and risks, from employee lawsuits to outstanding debts.

Essentially, you should tidy up your business to ensure that it is in the best possible position for selling – for you and the buyer. Between paperwork, contracts, and litigation, navigating the intricacies of due diligence can take up a lot of your time. Speak to one of our professional advisors today to discuss our comprehensive approach to due diligence.

4. Is your senior management team ready?

If you are planning on an MBO exit, you must be confident that your management team can run the business without you. They need to be able to make decisions without your input and efficiently manage the day-to-day running of the business. If you’re choosing this route, your management team need to have their funds in order. While investing their finances into the company isn’t always viable, they can secure funding. However, if your management team cannot secure funding in time, then a deferred MBO might be a better option.

If you are selling your business to a third-party buyer, they’ll be looking at your management team. They’ll want a seamless transition, whereby the management team is strong enough to ensure a streamlined continuity of business.

Whichever way you plan on exiting your business, your management team need to be ready. The business can’t come to a standstill once you’ve left.

Although you might not be thinking about selling your business seriously for a few years, we recommend you put the wheels in motion. Seek advice from professionals and start planning early to achieve the best possible outcome. If you would like to speak to one of our expert advisors about exit planning, we’d love to hear from you.