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Engineering an excellent exit

Sooner or later, most entrepreneurs reach a point where they want an exit to capitalise on their life's endeavour. Indeed, although it may seem contradictory, the truth is that it's really wise to make the planning of your exit a key part of your business launch strategy. It's never too soon.

And, frankly, as bankers and business advisers, we know that potential investors prefer enterprises with a clear strategic purpose. So, what are your exit options? In practice, we find there are less than half a dozen important ones.

SELL IT OUTSIDE

A 'trade sale' to another organisation is the commonest exit route for a business owner. It can involve the sale of the whole of the business, or part of it to, say, a private equity firm or a similar investor. It's clearly important to maximise the attractions to potential acquirers. That means having a clear business strategy and a capable team around you – their drive and commitment will often be a key asset, too. Which is why you may often be required to 'earn out' your own exit over a given period.

By the same token, there's a potential exit downside in a business that's overtly constructed around the present owner's idiosyncratic sets of skills, and which reflects that owner's dominant business personality and contacts.

Potential acquirers are increasingly making these non-financial considerations – their target company's culture, its people, its marketing and sales potential – key parts of their due diligence. The big questions they're asking are: How good a fit is this enterprise with our own? Is this actually a one-man band, or can it add real value?

SELL IT INSIDE

There are really two variations on this theme: A management buy-out is the usual route and, some would say, the easiest: you're exiting by selling the business to the management team you've recruited and developed, the people you trust and who, in many cases, have been working with you in the explicit knowledge that this purchase opportunity would arise.

In two respects, though, it's potentially tricky for you as the current owner. If it's a 'single bid' sale, exclusive to the present management, you must expect that the absence of trade competition will depress the sale price.

And, until the sale itself is concluded, both you and your management colleagues will need to operate with separate teams of professional advisers and bankers, which could strain the working loyalties you've so carefully cultivated.

An all employees buy-out: this route has been growing in popularity, boosted not least by research suggesting that the active and motivated engagement of employee owners does significantly enhance company performance.

Its exclusivity also tends to depress sale valuations, but it's actively encouraged by the government with more relaxed company and tax law provisions such as Enterprise Management Incentive Options, Company Share Option Schemes and Share Incentive Plans.

It's also possible to hold shares in a long-term employee benefit trust – the sort of co-ownership schemes operated famously by the John Lewis Partnership, for instance, Arup, the Baxi Partnership, Tullis Russell and many others. It's an approach supported by the Employee Ownership Association (www.employeeownership.co.uk) – a network of over 100 companies.

PASS IT ON

If you've spent much of your working life striving to build a business, there's clearly a big emotional attraction about seeing its control retained securely within the family.

Emotion is one thing, however; practicality is another. The key objective is to minimise any potential disruption to business continuity. And there are two big questions to resolve here.

The first is whether you're sure that your child, (or children or other family member) actually wants to take on responsibility for the business. There's no point in making happy plans in your head only to discover that inheriting the family enterprise turns out to be the last thing your young son or daughter may have in mind as an adult.

The second practical issue is to distinguish between ownership and management. Both roles are pivotal, but it's vital to match each to the wishes – and competences – of the family inheritor: some families prefer to vest executive authority in a professional managerial employee; others find there is indeed a rewarding drive and ambition in the child which can be nurtured by working in the business in the years before your planned exit.

FLOAT IT

An Initial Public Offering (IPO) is a staging-post to exiting your business by selling shares in it via the stock market. 'Going public' can be highly rewarding, but organising the flotation can also be lengthy and costly which means that it's invariably sensible only for businesses with substantial turnover.

For owners of small and medium-sized enterprises (SMEs), there's a more suitable capital-raising or exit route through London's 'junior' Alternative Investment Market (AIM). It has the advantage of being bound by fewer regulations, but – as regards best timing – it shares much of the 'senior' market's unpredictability.

LIQUIDATE IT

If yours is a business that's been built essentially around yourself, the best way to fund your exit may simply be to close it down and capitalise the redundant assets to clear any outstanding business debts and to bank or invest the residue. The same might apply if you're stepping down from a family business which no-one wants to acquire.

It's wise to draw up an inventory of your saleable assets – the office premises if you own them, your furniture, equipment, vehicles and your stock and merchandise. Don't forget intangibles like business licences, patents or potentially valuable trademarks. Reckon on a liquidation value that's likely to be all of a fifth less than the retail value.

And, it's worth hiring an expert - an auctioneer, dealer or broker with expertise in each asset type - to ensure you secure best value.

Several of these exit routes, you'll notice, imply one final essential: deliberate and careful succession planning to ensure the talented teams are in place to carry your enterprise forward and so facilitate your own lucrative departure.

That legendary 'Oracle of Omaha', the Berkshire Hathaway investor, Warren Buffett, summed it up in characteristically folksy style when, aged 80, he finally anticipated his own exit by telling shareholders of his succession plan back in his Chairman’s letter in 2007: "I've reluctantly discarded the notion of my continuing to manage the portfolio after my death," he said, "abandoning my hope to give new meaning to the term 'thinking outside the box.'"

Good luck!

AUTHOR INFORMATION:

Contributor Chris Baur is an eminent newspaper and broadcast journalist and former Editor of The Scotsman newspaper, Views expressed by all contributors are their own. All information is correct as at October 2016.

Any views expressed by Lloyds Bank Private Banking are our current in house views as at September 2016 and should not be relied upon as fact and could be proved wrong. Views expressed by contributors are their own. All information correct as at September 2016.

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