Successful exit strategies

While over 50 per cent of owners believe that management is the single most difficult issue to address when selling their business, over 33 per cent have no succession strategy in place. GrowthBusiness reveals the results of Business XL's unique exit survey.

While over 50 per cent of owners believe that management is the single most difficult issue to address when selling their business, over 33 per cent have no succession strategy in place. GrowthBusiness reveals the results of our unique exit survey.

Exiting a business is a complex transaction involving intricate procedures and processes that need careful consideration.

There are many different players involved (the buyer, the seller, investors, professional advisers, management, employees and family) and a wealth of financing options to weigh up. On top of that there are an array of competing interpretations on how the business should be run in future, what its growth prospects are and – crucially – what it is really worth.

What is clear from all of the aforementioned is that it’s often difficult for entrepreneurs to exit their businesses on their own terms. What is equally clear though is that it’s never too early to start thinking about the exit – and the professional help and assistance needed to maximize the value you can extract from the process.

In light of this, Business XL, in association with leading lawyers Nabarro Nathanson, The Royal Bank of Scotland and private banking group Coutts, has conducted research amongst its readership to determine when leading entrepreneurs start to plan their exits, what they feel is important to get ready before they exit, and the advisers they are most likely to turn to for help.

Knowing when to exit

Getting the best price for your business at exit (or partial exit) is all about selling at the right time. While this seems obvious enough, experts have pointed out that many vendors wait until the business has stopped growing before they attempt to exit, or have this option forced upon them by personal and/or business circumstances.

The results of our survey seem to bear these traits out. No less than 36 per cent of respondents said the reason that would most influence their decision to exit their business would be retirement. A further four per cent cited personal reasons or shareholder pressure would most influence their decision, while four per cent said not having a family succession plan in place would be most important. Only 22 per cent of respondents said the reason that would most influence their decision to exit would be that the business had reached premium value.

Another interesting outcome was that, despite the strong appetite for flotations on the Alternative Investment Market (AIM) â“ the first quarter of 2005 welcoming a staggering 130 companies to the market â“ flotation is the least favoured exit route among our sample CEOs. This is perhaps explained by the fact that the majority of survey respondents expect to retire or to move on to other businesses. Moreover, completing a flotation is also deemed the most expensive and time-consuming option. Trade sales, on the other hand, are the most preferred exit route and also deemed the least expensive and quickest option.

Succession struggles

For those considering an exit, the strength of their management team is considered to be by far a business’ most valuable asset (36 per cent), followed by reputation and brand (25 per cent).

Having a strong management team in place can be advantageous as it is a good selling point if the venture capital (or other) buyer does not have a management buy-in team waiting in the wings or an investment in a similar sector in its portfolio, which it will use as a buy-and-build platform. Conversely, if the buyer does have these arrangements in place, a strong management team in the company being sold can be a disadvantage, as the reorganisation of the business post-deal may prove to be highly disruptive.

Getting on a buyer’s radar

Surprisingly, less than two per cent of those surveyed believed that they should address the market’s perception of their business ahead of an exit.

Ignoring the market, however, is never a good idea. ‘It’s really important when you are looking to exit to keep the good news machine cranking along. You need to make sure potential buyers don’t assume you are just getting excited about the fact you are selling, otherwise they will think you have taken your eye off the ball,’ warns Charles Hoult of brand communications agency Loewy.

Interestingly, 34.5 per cent cited targeting the competition as their preferred route to finding a buyer.

The benefits of approaching a trade buyer in your sector are that the deal will often be an excellent strategic fit and they should understand your business â“ all of this could lead to the transaction being completed faster.

However, there are several inherent dangers in opening up your books to a competitor and passing on crucial information about your business model and approach. If the deal collapses, a rival will get valuable insights into how you operate for the price of a confidentiality agreement and a due diligence exercise. If you do approach a competitor, ensure you employ advisers that are able to produce watertight confidentiality agreements (or as watertight as they can be).

Exit preparation

Taking the necessary time to groom your business will minimise the risk of disruption later on. Having to deal with unforeseen issues at a vital point in the latter stages of the exit process could send any deal off the rails, causing delays and, therefore, risks, to soar.

As such, it’s not too surprising that getting experienced, professional advisers on board is by far the most important issue for our CEOs when it comes to seeking out a buyer for the business.

The crucial role that advisers can play is further underlined by the majority of respondents showing that they would, in the first instance, either approach their accountant (45.7 per cent), or corporate financier (32.4 per cent), to help them value their business. Lawyers and banks followed next, with 9.5 per cent and 8.6 per cent choosing these options respectively. This is largely because, as well as putting your operational and accounting matters in order, you need to pay keen attention to all the important legal, contractual and (if applicable) intellectual property issues.

Post-exit strategy

The majority of those surveyed have not got a wealth management strategy in place. But for any exit strategy to bear fruit in the long-term, a close eye will have to be kept on the Inland Revenue. If you are selling your business, minimising any tax liabilities should be a strong concern. If you are handing it down, issues such as inheritance and capital gains tax are of prime importance.

One area that is frequently overlooked in these circumstances is the extent to which a portion of the increase in capital value of a company may be subject to income tax in the hands of the owner-managers (and corresponding NIC charges). This is particularly the case since legislative changes made in 2003 made clear that the founders’ argument, which many owner-managers expect to protect them from any such income tax, is ineffective in the vast majority of cases.


  • Research was carried out amongst 148 CEOs of companies with a turnover of £10 million-plus.
  • The average age of respondents was 51 years old.

Business Exit Case Study – Networking is key

Peter Smith is founder and chief executive of document management business EDM, a venture that has been going for just over one year. As a venture capital-backed concern, Smith’s exit strategy is already in the pipeline, and this will be the second one he hopes to complete.

His first business, IT concern Hutchison Smith, founded in 1995 and majority funded by Legal & General Ventures, was sold to Hays in 1999, after he had grown turnover from £40 million to £90 million in three years.

‘Three years after founding the business, we were seriously beginning to consider what our likely exit options were, although this had been mapped out in our business plan from day one,’ explains Smith.

Both a trade sale (Smith was approached by Hays) and an IPO were serious considerations, and Smith even went as far as appointing advisers to work on the flotation process. However, at the end of the day, says Smith, ‘the offer from Hays was as good as could be expected.’

Market conditions did influence, to a great extent, his decision, as the timing of the flotation coincided with concerns around the robustness of IT systems and the so-called Millennium Bug.

‘Hays had known us for some time – and I had met with the directors on a number of occasions. Our financial advisers, Granville, were also very well connected, giving us access to a useful network. Whilst at Hutchinson Smith we worked with a number of partners who I identified as potential buyers. You need to develop relationships with your advisers and your peer network,’ advises Smith.

He remained with the business once it had been acquired, as part of the deal required him to stay on a two-year earn-out. He achieved this within a year, and left the business 12 months later to start EDM. ‘I’d had the idea for EDM whilst I was at Hays and I originally put it to the board, but they decided not to pursue it. I appointed advisers to look at all the companies in the UK in the document management area, as I wanted to pursue a buy-and-build strategy,’ adds Smith.

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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