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The Five Ways to Exit a Business

There are five basic ways to exit your business.

  1. Delegation – put the business under management and remain as a shareholder. You can bequeath your shares as you wish in perpetuity as long as you have done what is necessary to put your business on a sound footing with a capable management team.
  2. Succession – pass the business on to a family member to run. This is ideal if you have one that wants to run the business, has the capability to drive it forward and has worked in the business to learn about its various aspects. In many cases though, these criteria are not met, and second-generation owner-managers can be problematic for businesses.
  3. Sale – put the business up for sale to a third party, current management, employees, or offer shares for sale through an IPO (ultimately to trade publicly on the stock market).
  4. Close the doors and walk away. Based on the Office of National Statistics analysis, a significant number of UK businesses end this way.
  5. Death in service.

Any one of the first four exit routes could be attempted after the owner’s death (route 5). Unfortunately, if the business hasn’t been prepared for management, succession or sale then it is unlikely to be as smooth, lucrative and sustainable as you would probably like. It is therefore preferable to put steps in place to exit before this point.

Fortunately, the steps involved in any of the proactive methods (1-3) are largely the same, the main differences being (i) the intent (ii) preparation of the people involved to accept the new leadership, or (iii) preparation of people for their new leadership roles and (iv) finding a buyer if going that route. That might sound a lot, but almost everything else with regards to preparing the business is the same. You’ll want to show historical growth and a future growth plan. Depending on the size of the business, you’ll want to have a management team in place and documented systems and processes. You’ll want to have good repeat business, good customer satisfaction and positive cashflow during the growth cycle. Together, these will make the business attractive to a buyer (so the sale will be more lucrative for you) or they will give the new management a fast start as they take over the business and make the first months, even years, far easier.

So let’s look at selling the business as a specific case. A supplementary reason for considering sale as a specific case is that the value of your business is a useful measure of the success of your business strategy and management. Business valuations are often based on a multiple of profits, the multiple being based on the perceived scalability and sustainability of the business in the future, i.e. the success of your strategy to grow historically and the remaining growth that can be perceived in your growth plans and strategic documentation (as created so far).

A well-managed growing business with good cashflow and few dependencies on critical suppliers, staff, customers or the owner, will sell for a higher multiple. As high as 40+ times has been recorded by our clients. On the other hand, the average owner operated business sold for a multiple of 3.6 times their annual operating profit in 2016, with some selling for less than their annual profit.

Based on these figures alone, it is definitely worth investing time and money on building a saleable business. It might be the biggest pay day you have and even if you don’t sell, you know it is in good shape when you step down as MD and take up the shareholder role as your only involvement. Subsequently, you can monitor the future value of the business as a KPI of the management you entrust with your asset.

If you’d like to find out how much your business could be worth right now, try our online business valuation calculator and when you’re ready, get in touch to put a strategy in place to maximise the value of your business.

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