Having a successful exit strategy ensures a business owner can sell their ownership in a company to investors or another company for a profit. At ICON Business Solutions we see many business owners fail to plan for exit and continue working into their late sixties and seventies which runs the risk of ill health and potentially the business being sold for little value. The outbreak of Covid-19 may now force companies to review what their exit strategy may be, or in some cases to start to put one in place.
The reality is that no business owner starts a business with failure in mind. The fact is that only half of all small businesses employing people survive for more than 5 years, and Covid-19 will only exacerbate this trend. Whilst most business owners may try to focus on survival, it may also be time to consider what will happen if your business fails. If this is likely, then having a realistic exit plan in the event that your business is unsustainable is imperative. This will not only help you to maximise any potential return, and to minimise loss. It will ensure you also stay in control which will help you to minimise any potential stress and anxiety.
In setting out the exit plan, the key questions to ask are:
- How will you extract funds from the business?
- What will be the value on exit?
The main requirement is to have a plan. For example, if you are selling to an investor you must be able to demonstrate how they can achieve a return, and all of this needs to be worked through over time. Set out below are the main exit options to consider.
Your employees may want to take your company over. You may offer them profit share and buy-out options to acquire your shareholding over time. This is a quick and easy option, but you will need to ensure your team can sustain and grow the company, otherwise this option may prove fruitless.
Is there a family member that can take over the reins? If this is the case, you can involve them now and help them in the transition providing they prove capable. If not, you may still be able to revert to one of the other options for exit.
These two options may provide a route for you to have a ‘cash cow’. If your business is stable with a steady revenue base with little or no debt, you may be able to use one of these 2 options to find people to run the business for you and which will provide you with a regular return.
Are there competitors or ‘associated’ businesses that may benefit from acquiring your company i.e. a merger. Otherwise, are you aware of potential buyers who may have more skills and interest on the operational side of the business and can scale it.
This will only be an option for a relatively small number of companies and specific advice will need to be sought if this is a realistic option.
The next set of options are relevant if you feel you may be unable to trade through over the short term.
If your business is clearly insolvent, a Company Voluntary Arrangement (CVA) is often the best way forward. This offers you protection from legal action against your outstanding debts, giving you the breathing space to negotiate arrangements with your creditors and if necessary consolidate your borrowing. In this situation, your creditors will receive at least part of what they are owed, whilst you avoid an insolvent liquidation or administration and retain control of your business – meaning you have the chance to turn it around and get it back on its feet.
In this scenario you can sell off all your assets, get the money and hope you can cover your debts and have something left over. However, this is only feasible if you have significant business assets, and the liquidation process will need to be funded by you.
If you have no other options, you will have to file for bankruptcy. Some assets can be protected when you do so, so this won’t be a total loss, but bankruptcy does have serious implications and can affect the way you live for several years.
In summary, the main benefits of having a good exit plan is it will help you to maximise your return on your investment. With financial impact of Covid-19 on business, this may now mean you may need to consider extracting yourself from your business at least cost and financial exposure.
Don’t wait until you get into trouble to think about an exit. Think about it now. Call your nearest ICON Advisor who can assess your options with you.