5 Exit Strategies for SMEs
When putting together a business plan, one of the key areas that a business owner should be considering is the exit strategy. Though it may seem strange (particularly if it’s your first/only business) to plan for your exit, this section of your strategy is fundamental.
Every business exit owner will one day ‘exit the business’, whether that’s to move on to projects/opportunities or to simply retire.
Why do I need an exit strategy?
Exit strategies help business owners to stay on track with business goals, to benefit from their business exit, and to outline the level of involvement post-exit.
Each different exit strategy will impact the business owner in a different way. For example, if you were to sell or transfer ownership to family, it is more likely you will have continued involvement in some way or another. Not every business owner will want this, so this might be a factor in deciding which exit strategy to choose.
How do I plan my business exit?
You should begin planning your business exit as early as possible, as often the process takes much longer than is often perceived. There are various steps involved for planning your exit strategy and some of the administrative side of the exit can take years to organise.
We recommend you begin planning your exit strategy at latest 5 years prior to your planned exit.
For more information on the steps involved, download our infographic ‘Your Exit Strategy Roadmap for Success’.
What are the exit strategy options for SMEs?
If you’re an SME considering selling your business in future, here are our top five exit strategies to consider. While this list is not definitive, it does cover many of the common exit plans used by SMEs today.
Initial Public Offering (IPOs)
'IPO' stands for 'Initial Public Offering' and refers to a formerly privately owned company listing its shares on a stock exchange. This means these shares are able to be bought by the public.
Pros:
Funding is much quicker and easier, with less risk and debts.
It is often easier to invest in advertising and a higher-skilled team once you are public.
Cons:
The transition to an IPO is not cheap, and you will need to invest in lawyers, accountants and investment bankers to ensure everything runs smoothly.
Company information becomes publicly available, with board members under scrutiny from shareholders and the public.
Outside Sales
An outside sale is finding an individual or another company - an external buyer - who is ready to invest and operationally run a business.
Pros:
You’re more likely to sell for a higher value, because the buyer is interested and ready to invest
You can be confident knowing that your business is going to continue growing post-sale
You might sell quicker with a faster exit. They’re likely to be experienced business leaders who can move fast.
Cons:
There could be changes to your management team, with an outside buyer trimming back the team
Your culture and legacy could be quickly changed to suit the culture of the buyer
Management Buyouts
In layman's terms, an MBO involves a company’s management team bringing together the financial resource to purchase all or part of the company.
Pros:
You’ll have more control over the sale process and the next steps, than you would selling to a third-party.
You can feel confident knowing the people who are going to run your business
It’s a quicker transition as your handover won’t be as significant. Your teams will have a good understanding of the business management
Cons:
You might sell for a lower value, as your management team might not have significant funds.
The management team may understand the roles and operations of the business, but not necessarily what it takes to be a business owner.
It can cause friction between the already existing team and the business owner.
Employee Stock Ownership Plan (ESOP)
Employees can buy stock directly, be given it as a bonus, can receive stock options, or obtain stock through a profit-sharing plan. A well-known example of this working successfully is the John Lewis Partnership, which includes the Waitrose supermarket chain.
Pros:
They provide a long term benefit for employees. This type of benefit package is attractive for top talent and can help people emotionally, mentally and financially invest in a business.
It offers tax and investment benefits.
ESOPs allow you to move at your own pace out of the business, selling gradually over time if you desire.
Cons:
Current shareholders may not maximise the value if selling to an ESOP.
It can often have multiple expenses associated to it.
Transfer of Ownership to Family
This is the process of transitioning the legal ownership and overall management of the business to individuals within the family.
Pros:
You have time on your side and can transfer at your own pace.
You have full control over the transfer in terms of value.
It can allow you to maintain the family values within the business and ensures your legacy is not lost.
Cons:
It can be complicated if you’re not 100% ready to let go of the business, leading to friction within the family if the successors are ready to move forward.
It can be emotional, rather than solely business-based.
Do you need support with your exit strategy?
The Finance People are a team of Finance Directors, working flexibly to help your business move forward. An exit strategy plays a fundamental role in your business plan and business growth – check out our blog: 4 Reasons to Create an Exit Plan Right Now.