Planning an exit that’s right for you

Neil Rudge, chief banking officer, commercial at Shawbrook, discusses the merits of different exit strategies for SMEs.
4 mins read

All good things must come to an end, so the saying goes. If an entrepreneur wants their business to remain a ‘good thing’ for many years to come after their stewardship, they must have a strong exit strategy and succession plan in place.

Ensuring a smooth exit is not just important for the continuity of a business and its stakeholders, but can allow an owner to enjoy a healthier financial reward for their years of labour and entrepreneurship.

We recently polled more than 500 senior decision-makers at small and medium sized enterprises (SMEs) on the topic of exit strategies.

The findings revealed that two-fifths (41%) of key decision-makers are potentially exiting their businesses in the next five to 10 years, with nearly a fifth (17%) saying they will definitely exit within that time period.

As SME leaders will be keenly aware, there are a plethora of ways to execute an exit, all of which have their own set of unique advantages and challenges.

The difficulty often comes in choosing which pathway is right for you, your employees and your business.

What options are available?

Whether it’s to pursue other opportunities, retirement, or feeling that they’ve taken the business as far as they can, many business leaders look to exit their business without having any family or a natural successor in place.

When this is the case, they have several other options at their disposal. They may choose to sell to their existing management team via a Management Buy-Out (MBO).

These deals typically involve the existing team seeking external capital or finance to support the purchase, our research indicates that nearly a fifth of respondents (19%) see this as their preferred option.

An increasingly popular method of exit is via an Employee Ownership Trust (EOT), whereby the ownership is passed to a Trust which is then managed on behalf of employees with qualifying employees of the company receiving a share of the profits via the Trust.

An EOT may be a good option for owners who have built a strong relationship with the existing workforce at the business and this method of exit also comes with some tax advantages on the sale, though it is worth noting that this can come at the added cost of lower valuations or a more complex sale structure.

If an owner is simply seeking the largest return they can obtain for their years of service, a private sale may be their best option, and in fact, our research points to it being the most popular with 27% of those surveyed naming it to be their preferred route.

Mergers (21%) and acquisitions (27%) were also high on the list of preferred exits, offering the owner the possibility to secure a strong multiple for their business whilst ensuring the enterprise has the path to a bright future in collaboration alongside the other party involved in the deal.

In a sign of incredible optimism amongst the UK’s SME community, our research indicated that one in ten respondents plans to exit via IPO, traditionally a method reserved for only the largest and most promising enterprises.

One last option that we are seeing huge growth in popularity with at Shawbrook is exiting via a Search Fund or Entrepreneurship Through Acquisition (ETA).

These deals involve a high calibre MBA graduate, or highly experienced individual or partnership acquiring a business with the intention to run it with the existing management team, with the support of outside capital and bank debt.

Ultimately, the decision of which route to pursue lies with the owner who will consider several factors including the exit multiple, the future of their employees, the tax implications of sale and their long-term vision.

Where the owner is looking to fast-track the exit, external funding may be a useful consideration and working with a specialist lender can ease this process.

What plans need to be laid?

It is advisable for anyone looking to exit to seek the support of experienced and competent advisers to help them to explore and weigh up all of their options against their decision criteria. It is the job of the owner and finance director to demonstrate the value of their business to any potential suitor and as such, compiling a robust list of key performance indicators (KPIs) and trading statements is an important first step and is often the first thing any buyer would ask to see.

Determining an overall analysis of the company’s standing will be necessary, including assessing the key liabilities and assets, the strength of relationships with clients and customers, as well as looking into any existing contract terms. 

Establishing the key personnel in the business is also crucial. Owners must ask themselves who will be in charge after they leave and determine how the business will fare after their exit.

Establishing an initial transition period and working out how current employees will be incentivised to smoothly and successfully carry out this transition is also an important consideration.

Where the business owner is preparing for an EOT, a communication plan is vital so as introduce the role of the trust, share updates and ensure continuity throughout the process and post-EOT.

Lastly, the owner should consult their advisers and come to a conclusion on what the company is worth, but be open to the fact that different models will value a business differently.  Completing this step will set the owner in good stead for future negotiations.

Summary

The importance of securing a successful exit from a business, complete with satisfactory arrangements for all involved parties can not be underestimated.

The good news is that SME leaders have a wide variety of tried and tested pathways they can pursue in line with their own decision criteria.

The one constant is that proper preparations for exit must be made including compiling financial statements, taking a holistic view of the company, considering the future of your employees and management team and determining a fair valuation.

Critical to the success of any deal is engaging advisors to support the smooth running of the transaction and help you decide upon the most appropriate structure.

Neil Rudge is chief banking officer, commercial at Shawbrook

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