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A sharp exit

on Monday, 08 October 2012. Posted in Financial management, Finance

You’ve seen your business through the recession, but now perhaps fancy a new challenge. Clive Lewis, ICAEW’s head of enterprise, is here to offer advice on how to get shot of your business

A sharp exit

The recession has forced many businesses to cut costs, refocus on core markets and to maximise efficiency. As a result they are lean and mean – and ready for the upturn. What many business owners don’t realise is that this process is similar to the grooming that they will need to put their company through prior to a sale. For those who want to sell they need to plan their exit well in advance. 

Many business owners are great at building a business but have no idea about handing it on. There is a bewildering array of options and each has its challenges:

 

• keep the business in the family – you will need a suitable successor.

• sell the business to the management team – are they capable and can they raise the finance?

• bring in new management from outside – but you would still own the business and retain ultimate control of how it is run.

• a trade sale to another business. Perhaps the most common method of exiting a business but it can be time-consuming and disruptive, and involves disclosing confidential information to competitors. 

• close it down and sell off the assets. Employees would lose their jobs and your reputation could suffer. A management buyout can sometimes save a business in this position.

 

Once you’ve decided on the best route of sale, you need to plan carefully for the transition to a new management team. This process could start as much as 15 years before the business owner intends stepping down. The succession plan should be communicated to the management team as well as any family involved in the business to help prevent misunderstandings and future conflict. 

It’s useful to have a written succession plan, which should contain:

 

• the key goals 

• a timetable of the transition – from identifying a successor to the staged, and then full, transfer of responsibilities 

• contingency plans in case the intended successor declines the role or you realise they are not suitable

 

The plan should cover how the successor is to be introduced and trained. This could be a mixture of on-the-job and/or more formal training. It should also include time for the development of business and leadership skills. It may include gaining experience in other businesses so they can bring fresh skills and ideas to the business. It could also be a structured programme within your business so they spend time working in each area of the business.

A major consideration is how to phase your departure. This can be achieved by gradually transferring some key responsibilities to your successor or by reducing the number of days you work in the business.

One of the most important things during a sale is netting the highest possible asking price. There is a lot of confusion about sale prices: while owners generally overestimate the value of their firm at six to seven times net profit, buyers tended to aim for two to three times net profit (plus asset value). The latter is the most likely final price. 

However, businesses with unique assets and/or intellectual property, or on the leading edge of an under-exploited area, could command higher selling prices. 

It follows that an under-performing business is likely to attract a lower valuation. This can be damaging because potential purchasers are wary of an undervalued business.

In some business sales the owner of the firm remains for some time post-transfer, to ease the transition. This is a more common scenario than the purchaser working in the business pre-transfer, and mostly applies to specialist niche businesses rather than straightforward, generic firms.

Due to the current state of the economy, many will take this opportunity to reassess both their business and their work/life balance overall. Careful planning will help ensure that you get the sale and handover that you want so that you can relax in the next stage of your ‘career’.

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