UK: Exit Planning

Last Updated: 10 September 2012

Far too many business owners fail to plan for their eventual exit from their business. Some cling to the myth that a knight in shining armour will come riding along and make them an offer they can't refuse for the business. Others simply get so wrapped up in the day-to-day running of the business that they never take time to plan for their future.

Why should you plan your exit?

When you own a privately held business, your company is your biggest and most important asset. Whether your exit from it is planned or unplanned can make a huge difference to your future.

Without some sort of plan in place, you will likely receive a much smaller financial return on the business than you deserve. Worse, you run the risk of wandering aimlessly through retirement wondering "Who am I?" and "What went wrong?" But if you make conscious, purposeful choices about when and how to leave the business and what to do afterwards, you will end up with an infinitely more rewarding outcome.

The key principles of exit planning

Exit planning encompasses a wide range of activities. To win beyond business, and have a rewarding and fulfilling second half of life, you need to:

  • determine when, where and how you will leave the business
  • maximise the value of the business
  • decide whom you will sell the business to
  • choose a successor if you decide to transfer the business rather than sell it
  • use estate planning to protect your assets and transfer wealth with a minimum of taxes
  • discover who and what you are beyond the business
  • identify your true passions and callings
  • find new ways to achieve the sense of fulfilment your business currently gives you
  • set a course for the second half of life.

By addressing these issues you will dramatically increase the likelihood of a successful transition out of the business and into the next phase of life.

Four fundamentals of exit planning

1. Recognise your two distinct roles

As the owner of a privately held business, you have two key roles: CEO and shareholder. As CEO, your job is to make the best decisions for the business. As shareholder, your job is to make the best decisions about your investment.

When the time comes to exit the business, the interests of the two roles often do not coincide. For the CEO, exit planning involves figuring out what to do after leaving the business. For the shareholder, it involves turning an illiquid investment into cash and investing it in something else.

Effective exit planning must therefore take into account the differing needs of each role. In a successful exit, each role achieves its goals.

2. Position for the transaction

Selling a business is much like selling a home: in order to receive full value, you have to get it into top shape. Positioning a business for sale can take several years, so you should manage the company to maximise shareholder value rather than just top-line growth.

By focusing on the elements that will maximise value, you will automatically keep the business in good shape to sell.

3. Time your exit

To receive maximum value for your business, you must sell at the right time. This means paying attention to market and business conditions. Market conditions range from interest rates and merger and acquisition trends to the availability of investment capital.

4. Understand the scope and duration of your plan

A good exit plan encompasses several elements, many of which are outlined above. Moreover, exit planning is a process, not a one-time event.

Depending on your circumstances and the state of the business, it can take several years to develop an exit plan. Once it is in place, you should revisit it regularly as business and life circumstances change.

Creating your exit plan

To create an effective exit plan, you need to take three preliminary steps:

  1. Set your goals.
  2. Conduct a current state analysis.
  3. Identify your exit options.

1. Setting your goals

Ask yourself these three critical questions:

  • When do you, the CEO, want to stop working here?
  • After selling the business, how much would you like to have in the bank so that you don't ever have to work again (or worry about it)?
  • When do you want to get liquid, stop investing in this company and invest in something else?

By answering these questions, you will establish three important goals:

(a) the date the CEO will leave the business

(b) a financial target

(c) the date the shareholder will leave the business.

The answers to points (a) and (c) are often very different.

2. Current state analysis

This step will help you to work out how to achieve the goals you set in step 1. It involves a careful analysis of three key points:

  • the value of your business
  • the strengths and weaknesses of your business
  • your company's strategic position in the marketplace.

Start by determining a reasonable and realistic value for your business. Now compare it with your answer to question (b) in step 1. This may reveal a gap between how much your business is worth and how much you need to have in the bank in order to finance your retirement. If so, you may need to alter your plans – for example, by postponing your exit as CEO.

Next, diagnose your company's strengths and weaknesses so that you can fix any glaring defects or problems.

Finally, understand your company's strategic position in the marketplace by asking questions such as:

  • Which companies are buying other companies like mine?
  • Which companies are being sought by strategic buyers, and why?
  • Does my company fit that profile?
  • Who is likely to be a strategic buyer for my business?

The ideal time to sell is when your personal goals, the value of the business and market conditions are all in sync.

3. Choosing your exit route

Owners of privately held businesses have four basic ways to cash out:

  • selling to an outside entity
  • transferring the business to the next generation
  • selling to the management team and employees
  • an initial public offering (IPO).

Each of these methods comes with its own complex set of issues and questions. Look at all the available options, comparing them side by side, and decide which one will best help you to accomplish your goals.

How to value your business

One of the keys to successful exit planning is understanding the value of your business. There are four basic approaches to valuation.

  1. Asset-based value. This can be any of the following:
  • book value
  • adjusted book value
  • liquidated value
  • replacement value.
  1. Earnings-based value. For businesses without a lot of assets, earnings are a more reliable indication of value. Earnings-based values can vary widely, depending on a number of factors – for example, pre-tax versus post-tax or current versus future earnings.
  2. Cash-flow value. The most common cash-flow method involves discounted cash flow. This means you project future earnings and value that stream of earnings by discounting it according to an agreed-upon number.
  3. Public company multiples value. This method uses the current trading multiples of public companies that are similar to your company as a yardstick to measure its value. It will give you an indication of what your company is worth in terms of price to book, price to earnings, price to sales, and price to cash flow.

Staying in control

Many business owners want to take some chips off the table and still retain control. Here are three methods that work well:

  1. Employee share ownership plan (ESOP). There are various types of ESOP, but basically they all allow employees to acquire part of the equity of a company while the owner retains overall control.
  2. Recapitalisation (restructuring). Recapitalisation involves forming a new company to purchase the assets of the business.
  3. Multi-stage sale. This kind of deal works best when there are very high barriers to entry, or in high-growth situations where a strategic buyer can afford to wait a while to achieve the desired return.

If you would like more information on any of these three options, or indeed on anything else in this White Paper, please contact TCii on 020 7099 2621.

Getting the timing right

Timing plays a major role in landing the best deal. So your first priority, if you want to sell your business, is to decide not for how much or to whom, but when. Proper timing can increase the value of your business by millions of pounds. It also has an impact on the quantity and quality of potential buyers, and it affects the company's ability to continue after you sell.

To get the most for your business:

  • Don't sell when you're not having fun.
  • Don't wait too long to sell.
  • Be prepared to sell at any time.

Choose your moment

The best time to sell your business is when the future of your company looks brightest, not when you've reached a peak or have entered a down cycle. In particular, we recommend selling when one or more of the following apply.

  • You have dominant market share or a recognised position, such as price leadership.
  • You have some sort of technological or competitive advantage.
  • Margins are good and have the potential to get even better.
  • You have something – infrastructure, distribution or access to a niche market, for instance – that can be leveraged by the right buyer.
  • Your industry and market are in an up cycle.

Change your perspective

It will be helpful if, before posting the "for sale" sign, you:

  • recognise that the company is the product
  • look at your company through the buyer's eyes
  • understand the buyer's motivation
  • enhance the intangibles that make your business attractive
  • know the value of your business.

Obtaining the best price

There are several things you can do to ensure you get the highest possible price for your business.

  • Never state a price for your company. Let the market determine the price by discreetly obtaining offers from a variety of potential buyers.
  • Negotiate with multiple buyers. The quickest way to erode the value of your business is to negotiate with only one buyer.
  • Seek out strategic buyers. A motivated strategic buyer will almost always outbid a financial buyer.
  • Use an intermediary. Someone who is not emotionally involved in your business will be better able to present it in an independent, confident way.
  • Understand product and industry life cycles. Sell your company when both of these are on an upward growth curve.
  • Stick with your exit plan. If a deal doesn't jibe with your overall exit plan, don't sign on the dotted line.

How to sell your business

After addressing all the issues mentioned above, you should be in a position to answer the following questions.

  • What is the right time to sell?
  • Do I want to stay with my business after I sell?
  • To whom should I sell?
  • What is my business really worth?
  • What kind of help do I need?
  • What are the risks involved in selling?
  • What should I be doing now to prepare for the sale?

Getting ready for the sale

Smart business owners begin grooming the business for sale long before they actually put it on the market. We offer the following checklist to guide your preparations:

  • Document your vision.
  • Prepare audited and reviewed financial statements.
  • Make cosmetic improvements.
  • Pick out business opportunities.
  • Recast your financial statements.
  • Perform environmental reviews.
  • Purge obsolete assets, excess expenses and non-operating activities.
  • Settle any existing legal disputes.
  • Document operational procedures.
  • Evaluate your management team.

The selling process

The process of selling a business can be broken down into four distinct phases:

  1. Preparing
  2. Marketing
  3. Negotiating
  4. Closing.

1. Preparing

  • Assess the current state of the business and pinpoint any immediate "value enhancers".
  • Prepare a sale memorandum (also called an "offering" memorandum).
  • Identify and qualify potential buyers.
  • Craft a marketing letter to attract potential suitors.

2. Marketing

  • Release the marketing letter through appropriate sources.
  • Respond to interested parties by:

- having each prospective buyer sign a confidentiality agreement

- starting the process of pre-qualifying the prospects

- releasing the offering memorandum to all qualified buyers

- responding to their initial round of questions

- preparing additional information as needed.

  • Conduct off-site meetings to scrutinise the potential buyers.
  • Arrange for prospects to visit your business and "kick the tyres".

3. Negotiating

  • Collect letters of intent from serious buyers.
  • Strive to create an auction environment among the potential buyers.
  • Select the most promising buyer and announce that you have accepted their letter of intent.

4. Closing

  • Both sides conduct in-depth due diligence.
  • Negotiate the "definitive purchase agreement".
  • Sign and close the deal.

Pitfalls to avoid

To increase your chances of a successful sale, make sure you don't fall into any of these traps:

  • not being prepared
  • failing to check out the buyer
  • talking to only one buyer
  • talking with competitors
  • underestimating the value of the business
  • premature disclosure.

Succession planning

Succession planning addresses the question: "If I die, become disabled or otherwise leave the business, who will run the company and what will happen to it?" To put a good succession plan in place, you need to:

  1. decide on your successors
  2. plan for every contingency
  3. memorialise the plan.

1. Deciding on your successors

Assuming you don't sell the business outright, the options are:

  • family member(s)
  • partners and/or shareholders
  • professional managers or key employees
  • some combination of the above.

From these options, select a successor according to two criteria: 

  • Whom you want the business to go to?
  • Who is best qualified to run it after you leave?

Often, these two people are not the same.

2. Planning for every contingency

This means planning for any and all events – such as retirement, death or disability – that can trigger the succession plan. Be sure to designate the appropriate successor in each case, because they may not be the same.

3. Memorialising the plan

Formalise and memorialise your succession plan by putting everything in writing and creating the necessary legal documents, such as buy-sell agreements, partner agreements and living wills. These documents also specify where the money will come from to facilitate the transition of the business.

In the vast majority of cases, succession planning leads to a smooth, orderly transition of the business upon retirement or the decision to sell. However, your succession plan should cover the possibility of your untimely death or disability, by:

  • including an up-to-date financial statement
  • clearly stating what happens with key employees – who is in charge, and what roles they play
  • establishing a board of advisors to help your surviving spouse through the crisis.

In addition, we strongly recommend writing a "love letter" to your spouse that details what will happen to the business should you die unexpectedly, and whom he or she can turn to for advice.

Don't put anyone directly connected with the business on the board of advisors. Instead, choose independent, skilled business people whom you and your spouse both trust.

Protecting your assets

The final piece of the puzzle involves making sure your succession plan supports your estate plan, and vice versa. The secret to successful asset protection is to delegate wisely and well. You therefore need to:

  • create a team of specialists that includes:

- a tax accountant

- a lawyer

- a business valuation specialist

- a life insurance specialist

- a financial planner/money manager

  • select a team champion – someone who understands all aspects of your succession/estate plan and can communicate your goals to the other specialists on the team
  • clarify your succession planning goals and expectations for your team champion.

TCii has acted as team champion for numerous clients. Please contact us on 020 7099 2621 for further details.

A final cautionary note

To enhance your chances of a successful exit, avoid these common mistakes:

  • failure to plan
  • choosing a weak successor
  • lack of flexibility in the plan, particularly in terms of the sale or transfer of the company
  • getting so caught up in worrying about tomorrow that you neglect what you do best – running your company and making money.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.