How to plan an exit strategy for your business- brought to you by NatWest

Thursday, 15 August 2019

For many entrepreneurs, success is rapidly building up a business and then getting out after a few exciting, and hopefully lucrative, years.

 

Entrepreneurs who seek investment very quickly become familiar with the phrase: “What’s your exit strategy?” Angels are rarely interested in your business for the long term – they typically want you to sell up and make them a tidy profit in three to five years.

 

What is an exit strategy?

An exit strategy is an entrepreneur’s plan for leaving their business once certain criteria have been met. Exits aren’t always about a straight sale, though – owners sometimes orchestrate a management buy-out and go on to take a back seat in the company; occasionally there’s an initial public offering (IPO), although these are less common. There are other options, too, and investors typically want to know what an owner’s plan is before handing over any money.

 

A clear exit strategy can also benefit self-funded start-ups. Having an exit in mind enables the owner to run things with the kind of clarity that is sometimes lacking when the business exists chiefly to pay his or her salary.

 

Jerry Brand, founder of entrepreneurs’ charity The Brand Foundation, has set up and sold several businesses. He says that owners almost always have some kind of exit in mind when they start. “You’re not going to do this for the rest of your life, are you?” he says. “What’s important, I think, is that your exit strategy is 100% flexible because things change. You read the books, you think, ‘Yes, I’ll sell in three to five years’ – but it doesn’t always work like that.”

 

While figures vary, it’s been suggested that around 80% of businesses that are for sale don’t ever find a buyer – so an exit strategy that involves the sale of the business, as most do, is only likely to come to fruition if it’s realistic. The business you’re building needs to be something that someone actually wants to buy.

 

Build your next venture with a clear exit in mind

“When I started a sports-based social network, I guess we didn’t really think about an exit,” says businessman Toby Kernon, who admits that the exit they ultimately settled for – winding down the business – certainly wouldn’t have been one they’d have planned.

 

Lesson learned, Kernon joined a funding platform and became an investment director. “I became acutely aware of what investors were looking for, which is a return in three to five years,” he says.

His next venture, a car subscription service named Wagonex, was built with just such an exit in mind, although Kernon agrees with Brand that these things have to be flexible. “It’s down to you to get to the point where the business is attractive enough for somebody to want to offer you that exit,” he says.

 

Richard Gundle, MD of shelving retailer Tufferman, says that the best way for an exit strategy to stay on track is for an owner to remain true to the business’s core values.

“Don’t do things that don’t add value, or things that will just make a quick buck,” he says. “For us, a key part is building a business database. We have lots of consumer customers and we could easily go down the consumer route and start selling things for the garden, but the person buying us would then go, ‘Are they business-to-business or business-to-consumer?’ The danger is that if you’re too big a mix, people are only interested in half of your company and then they will value it less because they want to ditch the other half.”

 

Gundle does have some experience of exits, having sold his previous firm Field & Trek to Sports Direct in a multimillion-pound deal. His next venture was set up with a five-year exit strategy in mind, and a very clear plan about how Tufferman could become attractive to a certain kind of buyer.

 

Plan your exit slowly but surely

When the time to sell does indeed arrive, the first thing to do, according to Brand, is… nothing. “You have to very subtly let people think you might be available to sell because if you start making moves and people sniff it, it can knock quite a bit off the price,” he says. “The aim is to get an auction going, but you have to be quite canny about it.”

 

And if you’re wondering why you’d want to get rid of a business that you lovingly built up from scratch in the first place, it pays, perhaps, to be philosophical. “You’re creating a legacy,” says Alfie Best, who owns a number of companies, including Wyldecrest mobile-home parks. “The reason why you take a business to the market is for further growth, so your legacy can grow and you can also reap some rewards for your hard work.”

 

Three steps to take when planning a business exit strategy

Carl Reader, business adviser and author of The Startup Coach, shares his thoughts…

 

1. Grow an asset, not your pay packet. “The biggest problem that most owners have is that they run their business to pay themselves a day-to-day wage. As a result, decisions are made on the short-term basis rather than long-term. So a business owner has to get their head around the fact that for a business to be saleable they need to think of it as an asset rather than a job they can strip cash out of.”
2. Think in years, not months. “Effectively getting a business ready for sale tends to take about three years, and what businesses typically do in the three years running up to the sale is make sure all the books are clean. They make sure all income is declared, they cut out any costs they don’t need – it’s a bit like decorating a house before selling it. That process takes a few years because the numbers are only reported historically and it all takes a while to filter through. What business owners should do is make sure that all their books and records are put together in such a way that if a buyer asks if they can prove a number they can easily do so. It provides a level of confidence and builds trust.”
   
   
3. Get help from your advisers. “There are different ways to exit and you absolutely must get advice to work out which is best for you. Your lawyer, your accountant, your tax planner and probably your bankers will all need to be consulted.”

 

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