It’s never too soon to start planning your exit strategy!
In fact, when we’re talking to a client about starting up a business, we tell them that succession planning should be part of the same conversation.
One of the first things we ask business clients at Black and White accounting is “What’s your exit strategy?” which surprises most people. They’ve never been asked that by their accountants, or business advisors before, so they usually need a bit of time to reflect.
Quitting your business might sound negative when you’ve barely started but what you’re doing is setting your goals for your business. Your succession plan defines what success will look like and everything needs to be worked back from that point, including your business structure, organisational structure, vision and values etc. You also need to break your goals down into bite-sized chunks to ensure you get there.
That’s not to say you’ll have the same idea in five or ten years’ time, but if you have some goals, even if they change, you’ll know if you’re being successful or not.
It’s important to know what exit options you have and to choose which will suit you best. Generally, owners have five ways to exit their business:
- Close the business down. If your business comes to a natural end, you can sell assets (stock, property etc), settle liabilities and walk into the sunset. If it is a company and the net reserves are more than £25,000, a liquidator will need to be appointed otherwise an accountant can complete the process. Entrepreneurs relief will often ease the tax liability here.
- Sell part, or all of your business, either by a trade and asset sale or a share sale. You need to talk to your accountant about which option is best for your circumstances, as it will not only impact the selling price but also your income/corporation tax, VAT, employment tax, and potentially capital gains tax position.
- Management buy-out. If you have a good team in place, they can buy you out from within. This is good for continuity and both parties are dealing with known entities, so hopefully there will be fewer surprises.
- Run as an investment. No one likes to think it but if you have the right team in place, you are replaceable. Why not get a great manager or management team in to run your business? You can then reap the rewards of your work but on an arms length basis so you can focus on your other interests.
- Merger or acquisition. This can often be with businesses in a similar sector but potentially a different size to you. By combining you can unlock profitability by benefitting from economies of scale, complimentary skills or resources and efficiencies.
Please note: Larger companies can also take advantage of IPO’s but as these are not Black And White’s typical clients we have not focused on these here.
Whichever option you choose comes down to circumstances and personal preference, but they all require preparation planning. Waiting until the last minute runs the risk that your business is in the wrong shape and you won’t realise the best return for it.
Do you have a business to sell?
Is you business just “you”? When you walk away, there’s nothing left to sell, other than maybe a few small assets, so if you want to extract some value, you need to start handing over critical functions to others early on. Not only does this free up your time for other more important things, often to accelerate your growth, but it makes your business more sustainable after you’ve gone.
Don’t dilute your equity
If you plan to sell your business, you need to make sure you don’t give too much of it away beforehand.
A lot of start-ups, raise money by selling shares through the EIS (Enterprise Investment Scheme), which is a tax efficient way of investing money. Others offer share options for staff, for example through EMI (Enterprise Management Incentive) schemes which are a great way to motivate and reward staff. These can be a great way of unlocking funds and incentivising staff to accelerate growth. However, such actions can lead to the inevitable cycle of giving your company away and ultimately selling it.
Would you prefer to get £2million back in five years or £10million back in ten years?
You need to make decisions based on what you want, rather than be persuaded by other people’s desires.
Case study: how a business-savvy accountant can smooth your exit
A recent client of ours ran a high street hardware store in a market town. It’s a declining sector and they wanted to get out because it was increasingly tough to make the business pay. We worked with the owner to get the business in the best possible position before finding a purchaser. We then helped broker a deal to ensure the town retained a hardware supplier and our client received enough money to start a new life.
We were able to help this client, albeit at the last minute, the sooner we are involved the more we can do!
Another client only talked to us after buying a business that was to see them through to retirement. The result was they were tied into a four-year agreement by the seller that will cost them tens of thousands of pounds and won’t help them achieve their exit plan. We are working hard to find them refinancing options to improve their position but if we’d been involved before the purchase took place we could have done more!
Your first action?
Your business is your creation, the product of your hard work, and you should enjoy the benefit of that effort when the time comes. It’s never too early to have that discussion about how to pass the relay baton on, if indeed that’s what you want to do.
If you need to talk to someone with a wealth of business and tax planning experience about your succession plan, then contact Black and White Accounting today or ring us on 0800 140 4644.