Top Exit Strategies for SMEs
Running a small to medium-sized enterprise (SME) can be a rewarding venture. A well-planned exit strategy can ensure a seamless transition when you decide to pass on ownership to someone else. However, when it’s time to move on to new opportunities, many owners find that their business is one of their least liquid assets. Even the most experienced entrepreneurs often struggle to understand the exit strategies available and which one best fits their unique situation
This article will delve into the advantages and disadvantages of various business exit strategies and the appropriate times to implement them.
What is an exit strategy and why is it important?
An exit strategy is a plan devised by a business owner, founder, investor, or venture capitalist for leaving their business. This could involve selling their share or the entire company for a financial gain or transferring it to a selected successor.
Some owners establish an exit strategy as a goal right from the outset. For instance, they might aim to sell their business in 5 years to a competitor, targeting 20% profit.
When might an exit strategy be useful?
An exit strategy can be used to:
- Sell the entire company
- Sell a portion of shares in the company
- Relinquish control or reduce ownership in the business
- Take your company public by listing it on the stock market
- Close a business that is no longer profitable
- Cash out an investment after achieving profit goals
- Wind down operations if market conditions shift dramatically
- Prepare for retirement
Types of exit strategies
Family Succession
An appealing option for those who have a suitable member of their family that the business can be passed down to.
Pros
- Succession planning often happens over many years, meaning the family member has been transitioning to a leadership position, shadowing the current owner, and likely to possess intimate knowledge of the business.
- Original owners can choose to retain close connection to the business, staying on in an advisory or consulting capacity. This means knowledge stays within the business.
- Often a quicker and less expensive transition
Cons:
- Often, the full value of the business may not be realised.
- Sometimes, there may not be anyone in the family who is capable of taking on the role.
- Blurring professional and family lines can add emotional or financial stress to a family. Perceived unequal involvement or perceived favouritism can lead to costly and lengthy disputes.
M&A
Mergers and acquisitions include selling your business to another business, who may be looking to increase their product and service offering, eliminate competition in market, increase their geographical footprint or acquire your infrastructure, people or IP. This type of exit strategy is particularly enticing to start ups and entrepreneurs.
Pros:
- Business owners can maintain control over price negotiations and set their own terms.
- If there’s a competitive advantage to be gained by the buyer, or multiple bids are submitted, price can be driven up even further.
Cons:
- This form of exit strategy is often time-consuming, costly, and regularly fails.
- Acquisition can lead to loss of brand identity within the larger acquiring business, and swift restructuring impacting staff and morale.
- This form of exit comes with a myriad of legal, tax and commercial considerations that are complex for acquirers to navigate without professional help.
Selling your stake to a partner or investor
Venture capitalists are always looking to add profitable businesses to their portfolios. Similarly, if you are not the sole owner of a business, you may choose to sell your stake to your partner.
Pros:
- Minimal disruption to the business and revenue.
- When selling to an investor, the process can be quite quick as they are usually well versed in a buyout.
Cons:
- Finding a buyer or investor can be difficult or time consuming.
- The sale may be less objective and therefore not as lucrative in terms of the offer.
IPO
An initial public offering (IPO) exit strategy entails selling shares of stock to the public, thereby transitioning the company from private to public ownership. This approach is ideal for companies that are well-established and capable of handling their responsibilities to shareholders.
Pros:
- An IPO is one of the most lucrative business exit strategies in terms of valuation and sale price.
- It can boost publicity, enhance reputation, and increase brand awareness.
- It can also quickly fund a business experiencing rapid growth.
Cons:
- An IPO is one of the most complex and costly exit strategies. It can take several months, if not years to complete.
- It requires extensive initial and ongoing documentation and reporting.
- Shareholders gain substantial influence over the company’s operations.
Liquidation
A common exit strategy for a failing business. The business is closed down and assets are sold off. Any cash earned is usually used to pay off debts or shareholders.
Pros:
- This exit strategy can be simpler and faster to execute than other methods, such as acquisition.
Cons:
- This form of exist is likely not a high-value exit.
- You may burn bridges between you and your staff, partners and customers.
Any exit strategy is going to need an expert business partner to guide you through the process. Seeking guidance from an expert with help ensure a smooth process, from helping select the right exit strategy, reviewing historical financials, ensuring the accuracy of projected forecasts and helping with lodging any documents and closing on an offer. Hiring the right business advisor early on in the process can significantly impact on the outcome of the sale. Get in touch with us if we can help you through this process.