When setting up a new business you will more than likely have a clear vision of what you want to achieve from it. It is easy however, to forget that the decisions you make in the early days will affect not only how successfully your business gets off the ground, but will also impact on your potential exit from the business further down the line.
It's essential to think about how you'll leave the business in the future to maximise the value you gain from it later down the line.
We’ve complied some key areas to consider when starting a business so that you don’t experience difficulty when you decide it’s time to go. It will seem premature to think about leaving a business you’ve not yet fully setup but let’s look at why you should make those considerations in the first place.
Benefits of an exit strategy
Planning your future exit from the business can help you to:
- sculpt your business into the ideal shape for your chosen exit option, maximising the value you get from it.
- prepare successors if they're coming from within the business, whether they're a family member or part of your management team
- exit at a time of your choosing, when the business is doing well and the market conditions are advantageous
It’s desirable to include an exit strategy in your business plan. It can then be revised if necessary whenever you have your review with your accountant to work on your annual business plan and budget, thereafter you can steer your business in the direction that your exit option demands.
If you manage an existing business and don't have an exit plan, you should think about what your preferred exit option might be and consider whether you could change the way you run your business to help you achieve it.
What is affected by a business exit?
The way in which you exit can affect:
- the value you and other shareholders realise from the business
- whether you receive a cash deal, deferred or staged payments
- the future success of the business and its products or services
- whether you retain any involvement in or control of your business
- your tax liabilities
Key considerations when starting a business
You'll need to consider the following when it comes to ensuring your exit plan from the start-up of your business.
- Legal Structure - the business form you choose can restrict your exit options and affect how potential buyers view the business. For example, a sole trader can simply close the business and pay off any outstanding liabilities but a limited company with a separate legal identity might be more attractive to potential buyers.
- Articles of Association - these set out the rules for running the company affairs. If the articles of association are too restrictive they could limit what the business can and can't do. This could put off potential buyers or investors who are looking to diversify.
- Partnership Agreements - these may specify what will happen if one of the partners wants to exit the business, e.g. due to ill health, disagreement or retirement.
- Property Agreements - these can be notoriously difficult to get out of without suitable break clauses or the right to assign your agreement to another party.
- Shareholders - the involvement of shares and shareholders with voting or preferential rights can make it more complicated for an outside investor or buyer to take over the business.
- Capital and Ownership Structure - straightforward structures can help make your business more attractive and can minimise potential barriers to sale.
- Accounting Procedures - good financial and management accounts will give potential buyers and investors more confidence in your business and make completing the sales process easier. Speak to your accountant to arrange these.
- Contracts – whether with employees, customers or suppliers; clear, simple contracts for all business relationships can help avoid disputes, clarify responsibilities and make it easy for potential buyers to see what they would be taking on.
Seek expert advice from a trusted accountant
Before committing to any important decision, it is vital to seek advice from a suitably qualified expert such as an accountant or solicitor.
Selling or passing your business to a family member
An attractive option for many, selling a business to a family member means you can pass an asset to an heir whilst potentially allowing you to maintain involvement.
If this is on your plan, we advise involving the chosen family member/s in the business as soon as you can so they can develop their understanding of the business. You can do this if they are still of a younger age through work experience and involving them in strategic meetings so they can gain insight into how things work.
There is no guarantee that a child or family member will want to take on the business in the future, however it’s worth preparing early and developing their interest as soon as you can to increase the chance of them becoming interested in the future.
It’s advisable to seek advice from a third party such as your accountant or a non-executive director to assist you in considering all factors of the succession plan. An accountant will be able to advice what choices could maximise your future income and ensure they are tax efficient.
Selling your business
The most common exit option is to sell your business. This can be to another business, a private investor or an employee.
Trade Sale: A trade sale is when you sell your business, or parts of it, to another outside party either in or with connections to your field or industry. This is an attractive option as you have the potential to get the best price possible from potential buyers, so long as you have developed an attractive business.
To ensure the best chance of achieving a trade sale and access important tax benefits it’s beneficial for your business to be limited. It can also otherwise appear less well established and therefore less attractive to potential buyers if not as it’ll be solely reliant on your skills.
It is worth considering incorporating as a limited business if you did not start out as such, this will then give the business its own legal identity. This could also make a merger a possibility although it is likely to take longer that a straightforward sale.
Selling your business will also be easier if you can:
- show year-on-year increasing profitability
- show that the business can operate without you
- create a high-quality product or service
- develop an innovative product or piece of intellectual property
- build a strong customer base
- recruit a high-quality management team and employees
- maintain premises and assets in good condition
Buyouts: Another sale option is a management buyout where you sell your business to managers or employees. Though sometimes not as profitable as a trade sale, the interest might be fast as existing employees may want to ensure their place in the business as stakeholders. Before drawing up any paperwork, consider how you will manage the fact that managers or employees might not be able to raise the necessary funds to buy the business, or they may pay less as they fully understand the business - both good and bad - from the inside.
Closing your business
The closure of your business when you decide to exit might be the most practical option. It doesn’t have to be something forced upon you by poor trading or financial difficulties.
For example, if your business has become too dependent on your particular skill set to make a sale realistic, it may suit both you and your business to close when you exit.
Other times it might be the right decision for you could be; family members may be uninterested in taking charge, an unfavourable economic climate or other factors forcing you to take early retirement before you have had a chance to scale the business sufficiently for sale.
The way you close your business will depend on the legal structure you have chosen for it.
Sole traders may simply be able to close the business and pay off any outstanding liabilities, especially if there are no employees involved. VAT registration, employees, PAYE, tax and National Insurance obligations, premises and finance agreements can all make this process more complicated for anything other than the simplest business.
It's important to seek professional advice from your accountant in such circumstances.
The Big Decision
Deciding its time to exit a business can be daunting, especially if you’ve built it from the ground up. Although you can never under estimate the freedom tied to being able to go when you feel it’s time.
That’s why it is imperative you develop your business with an exit strategy in mind, so when you’re ready to leave, you haven’t tied yourself in loops and become trapped when you are mentally ready to move on to the next chapter or venture.
Give yourself the freedom to choose by working with your accountant to devise a viable exit strategy, as you never know what other opportunities the future may hold.
Speak to Blue Rocket Accounting today, our team of expert accountants can guide you through set-up and offer valuable advice in our regular review meetings when you need to adapt or re-centre.
Call today on 01322555 442 or email firstname.lastname@example.org