More than a third of UK businesses are owned by people that are either already at retirement age or will hit it in the next decade.
Yet ask them what their exit strategy is, and chances not all of them will know. This may sound alarming, particularly as they are potentially leaving thousands of pounds of unrealised value on the table, warns Ian Clark, Director & Partner at Kingsley Maybrook Ltd and a practising member of The Institute of Financial Accountants (IFA).
In the UK, on average less than 30% of businesses available for sale are successfully sold each year. Given that the average micro business has a saleable value of about £90,000-£100,000, that’s probably £100,000 of unrealised potential for retirement. Formalising an exit strategy is the single best option for increasing the personal worth of a business and helping future proof finances.
Lack of planning exposes high risk
Poor planning, juggling daily demands and a lack of innovation are just three reasons why business owners are woefully underprepared for selling their business when the time comes. In the UK, the general consensus is that around 60% of businesses have no exit strategy at all.
Of the 40% that do, only 10% have the strategy formalised and ready to execute, with the other 30% having unfinished, or unformalised versions. This leaves businesses at significant risk from unexpected events such as health issues, family breakdown, stress, or even global events such as the COVID-19 pandemic.
One of the key barriers to exiting a business is a lack of business strategy. Business exits are not just driven or expedited by an unexpected change either. As a growing trend of people seek a better balance in life by hoping to retire early, it doesn’t mean business owners are any better prepared to walk away.
Lack of planning can make the move, unplanned or otherwise, unnecessarily complex resulting in a loss of potential financial value. Exit planning is often overlooked because it is deemed irrelevant or unnecessary.
One of the key misconceptions by business owners is that they don’t need an exit strategy, especially if they’re gaining fulfilment in their work, have a good work-life balance and the financial security they need, as well as enjoy the clients they work with. Yet failing to properly plan can prevent a profitable exit from their business, and in a worst-case scenario, businesses can fail to find a buyer or successor and so are forced to close.
Exit planning checklist
Ultimately, an exit strategy depends on its current business structure and whether there is an obvious successor for the business, whether employees or family. Regardless of whether the ambition is to sell, or for succession, the following essential checklist must be used in order to realise the value of the business:
- Have efficient processes and practices been implemented?
It is crucial to implement appropriate practices, use them reliably, and ensure that the business is a well-oiled machine. Potential buyers or successors will want to be able to step into a business and continue running it the same, day to day, without a loss of service to clients. They can only do this if the business can run independently of the specific individuals that the business employs. This still applies even if they are a sole trader.
- Have practices been documented?
Businesses are a more attractive proposition, if the buyer is clear on how the business runs and can see and understand it. Documenting practices, processes, and even notes about client needs, acts as reassurance that the business is ready for sale.
- Is the business future-proof?
Buyers have enough to learn and manage when taking over, so they’ll want to see that the latest guidance and systems have been adopted, and that clients are being offered relevant, scalable services (if applicable), for a smooth takeover and pick-up. This is a key failing in the sale of many businesses, as operators, particularly sole traders, stick with doing what they’ve always done, preventing the value of their skills – client relationships and trusted advice – from being realised.
- Has value been maximised?
Owners must assess the business and identify the strategies needed to grow it, maximise profit and market attractiveness, in order to maximise the value. Then, these strategies need to be implemented.
- Are contingencies covered?
A lot of business sales and closures are driven by unexpected events. Health issues, family breakdowns, and stress, are all key examples. Business owners may not have the choice of how or when to sell the business, so it’s important to work out the steps to take in the event of these external factors. The business should be regularly valued – even if it’s a rough guide – so that in the event contingency planning is needed, there is some idea of what an acceptable return for the business would be.
- Has a target buyer been identified?
Identifying a model buyer can help guide thinking and planning to make the business a suitable candidate when the time comes. It is useful to have an idea of who the business is being positioned for, even if this isn’t an actual company, to take the necessary steps to make it attractive.
Selling to another sole trader who is starting out will be a different proposition to selling to a local competitor, or selling to an out-of-region business looking for expansion. They will want to know what makes the business a suitable candidate, the goodwill and value of the clients, and knowledge that they cannot acquire themselves if they were to start-up, and the plan for the future of the business and business continuity.
- Has clarity been provided to relevant stakeholders?
Most appropriate for succession planning, stakeholders that will have a role to play, will have an interest in the details. Understanding the exit timeline, the potential value or cost to exit, and the expectations, will make it easier for them to contribute.
The importance of regular reviews
What is key to note is that exit planning is not a one-size-fits-all; it is personal to the business and its owner, and is a case of planning the best fit for the business.
The single biggest thing for owners to do to prepare for an exit is to make themselves superfluous, ensuring that the business can operate effectively regardless of the person at the helm. It’s also essential that the plan adapts and changes as the business does, so it is important for businesses to revisit their chosen strategy at least annually.