What is your ultimate aim for your company? Have you prepared, or are you working towards, an exit strategy? Perhaps you haven’t given it a second thought and plan to go on running your company for years to come, but in business – as in life – things can change quickly.
Maybe you’ll need to step away for personal reasons, or the business becomes less profitable. Maybe you’ll decide you want to try a new enterprise. Whatever happens, having a clear exit strategy means that when the time comes to move on, you do so on your terms.
What exactly is an exit strategy?
It may sound kind of negative, but an exit strategy is simply a plan for what happens when or if you want to part company with your business. There are various exit strategies to consider, but first it’s important to be clear about your goals. Will you want a clean break or to stay involved in the business in a reduced capacity? Do you simply want to make as much money as possible and get out altogether, or is it important to leave the business in good hands? Circumstances at the time may determine what exit strategy you adopt, so let’s look at the various options and the pros and cons of each one.
Liquidate the business
One of the simplest ways to dispose of your business, this option means selling all assets and closing the business down in order to get some of the money back you’ve invested in the enterprise. Small businesses who are no longer profitable or experiencing unsustainable losses may choose this as an exit strategy.
- Pros: Liquidation can be quick and relatively simple. Once you’ve paid off creditors and any shareholders, you keep what is left.
- Cons: Likely to mean a low return on your investment as assets are typically sold quickly and for less than their true value. As well as meaning loss of income for employees, liquidation can damage your business reputation with clients and fellow investors.
Sell to another company
Selling to another business, especially a competitor is worth considering. If you have a thriving business, your company is bound to attract interest and you may already have been approached by competitors in the past wanting to buy you out.
- Pros: If your business is doing well or has great potential, the price of your company could soar. Facebook paid some $20billion for WhatsApp in 2014 when it was still a new business and had only 50 employees.
- Cons: Your company could lose its identity and staff their jobs as the business is absorbed into a larger entity or broken up. It’s worth remembering that some competitors may actually be more interested in seeing your customer list than making you a genuine offer.
Pass business on to family member
Passing the business on to the next generation can help to ensure continuity of the brand as well as secure staff jobs. It is also a relatively straightforward process without any outside interests being involved.
- Pros: You can create a true family business and help to secure your children’s future. You can plan the handover well in advance, allowing the next generation to learn the ropes for a smooth transition.
- Cons: Your daughter or son may change the direction of the company, leading to disputes, family tension and ultimately problems for the business.
Management or employee buyout
Similar to the above, an employee buyout can be considered a friendly option – selling the business to people or a group you already know and trust.
- Pros: Can be good for continuity and the legacy of the business. Staff believe in the business and management will be familiar with clients and running the company. Transition is likely to be smooth.
- Cons: A buyout can take time while employees raise the necessary funds. You may have to settle for a lower price than selling on the open market or be willing to wait to be paid in full.
Drain the business
This is similar to liquidating your business except you take money out of the business over time. Basically, you take large chunks of money by way of salary or in dividends and stop investing in the company.
- Pros: You can increase your personal wealth over time.
- Cons: Business starts to suffer as you’re no longer investing in its future and you may have to sell up sooner than anticipated. Staff morale is low in the meantime, leading to poorer customer service.
Depending on the size of your business and your situation, you may also consider a partial exit from the business such as through an IPO (initial public offering) for instance. Selling off stock will also mean having to hand over some managerial control, so you’ll have to be willing to accept a change in your status. But no matter which option you decide on, the key to a successful outcome is planning well in advance, and getting sound professional advice.
Protection Essentials for Limited Company Owners
Relative Life Cover - Save up to 50% on life insurance
The premiums are paid by your own limited company, resulting in a large tax saving. Read our guide here.
Private Medical Insurance - Essential health cover
Avoid NHS queues. Private treatment at a time that suits you and your family. Read our guide here.
Income Protection - What if You're Unable to Work?
Monthly income to cover expenses until you are well enough to return to your business. Read our guide here.