Every entrepreneur needs an exit plan, says Matt Crawley, partner and head of Corporate Finance at Lovewell Blake.
Whether they plan to run their business long-term until retirement, or they start up their business with a view to selling it on in a shorter timeframe (as is the case with many tech start-ups), every entrepreneur will eventually need a plan to exit their business, pass it on to a new set of leaders – and maximise the value they get out of it.
This inalienable fact does sometimes seem to surprise some business owners. Perhaps it’s because we don’t want to confront the finite nature of our own existence, or maybe it’s because running a business is itself all-consuming, but too many entrepreneurs fail to plan for their exit from the business, with the result that when the time comes, they either end up not realising its true value, or else experience difficulty in finding a way out at all.
As with so many things in life, preparation is the key. Every entrepreneur should have in the back of their mind a plan, not just for their business, but for them personally as well. And an integral part of that plan should be what will happen when the time comes to exit the business.
It’s never too early
It is not uncommon among millennial entrepreneurs in particular for the exit to be the driving force behind a business start-up itself. Influenced by media stories of short-term riches being made, some go into business with their exit being the number one aim.
That is, of course, an extreme view; most people who start a business do so because they believe in it, and the success of that business is their number one aim. But these are the very people who get so wrapped up in the running of their enterprise that they don’t start thinking about what comes next until it’s too late.
However, no-one is immortal, and the time will certainly come when someone else has to take over the reins. There is more to the process of transferring a business than most people think: getting the company to a level of success which will attract new investors, ensuring the right people are in place, or removing an over-reliance on the business relationships of the original owner.
In most circumstances, this takes time, and a period of five years during which the original entrepreneur prepares for their exit is often about right, so don’t leave it too late to start thinking in terms of an exit.
People are key
Whether the route to exit is a trade sale to another company or a management buy-out, having a strong team in place is key. For the trade buyer, the knowledge that the success of the business is not over-reliant on the original entrepreneur is important, and obviously an MBO can only succeed if the right management team is in place in the first place.
An integral part of planning for succession is to identify what skills will be required once the owner has exited the business, and then ensure that the right people are in place to provide those skills. For an MBO, someone with sound financial skills is a huge advantage as part of this team.
But it’s not just about the skills – attitude is important as well. That team needs to have the energy and drive to take the business forward. Some entrepreneurs fill key positions with people similar to them, in outlook and in age. If you are exiting the business because you have reached retirement age, you need the succession team to be at least a generation younger than you, to give them time to make their mark once you have gone.
This is particularly important if the exit is funded via an Employee Ownership Trust, whereby the sale of the business is essentially deferred, and funded through future profits – something which
will only happen if the business goes into that future in safe hands.
During the period leading up to the owner moving on, it is important that the new management team is increasingly trusted to run the business on a day-to-day basis, with the owner taking a more strategic role – basically a phased exit.
Look at the risk factors
Any potential new owner will look at a business through a rather less emotional filter than the person who established that business, and will be more ruthless in assessing potential risks. That means that during the preparation period for the owner’s exit, a similarly dispassionate view of the business needs to be taken.
So, for example, what is the situation with the lease on the company’s premises? Is there a big deficit in the pension scheme? How robust is the supply chain (for instance, is it over-reliant on manufacturing overseas, where the supply plug could be easily pulled)? How diverse is the customer base, or is the business over-reliant on one or two big contracts? How watertight are those contracts?
Now is also the time to conduct a thorough competitor analysis (as any potential buyer will do). Is your current competitive advantage about to disappear because of, for example, a patent expiry or a competitor development?
All of these risk factors could get in the way of a successful sale or MBO, and many of them will take some time to mitigate. So forward planning is again important.
A personal plan as well as a business plan
Too often entrepreneurs get so caught up in planning for their businesses that they forget they need to plan their own future as well. A crucial part of an exit strategy is thinking about what the individual entrepreneur wants to achieve – an immediate exit; a phased way out; a financial lump sum; an income for retirement; perhaps even the opportunity to go on and start another business.
For many entrepreneurs, the exit is not just about money. If you have given decades to building up a business, you will have an emotional attachment, and so finding the right buyer who will take care of your ‘baby’ might be important – perhaps even more important than financial considerations. I have known entrepreneurs to turn down compelling financial offers for their business in favour of less lucrative solutions which preserve the integrity of their life’s work.
In these circumstances, an MBO might seem the most attractive solution. But you must consider your options in the right order: attempt an MBO and fail, and your business will then have a demotivated management team which won’t be terribly attractive to an external trade buyer.
The keys to as successful succession and exit for entrepreneurs is to have a well-defined plan – both for the business and for the individual – and to take the time to implement that plan properly. Whatever their motivation for going into business, every entrepreneur has to face the exit sooner or later; the worst thing they can do is put their head in the sand and hope it won’t happen to them – because it will.