Q&A: Exit planning for small-business owners
Exit planning is not a priority for many small business owners. But failing to plan could mean you fail to realise the full value of your business. Jonathan Massing explains how to plan your exit, when to plan and why exit planning is crucial.
Jonathan Massing explains the importance of having an exit plan as a small business owner, and the benefits of having this planned out
Chartered accountant Jonathan Massing founded London-based advisory firm Kingswood in 1993. It specialises in corporate finance and professional services for small businesses. Massing has extensive experience of assisting in the sale and acquisition of companies, as well as advising owners on exiting their business.
Why do so few owners plan for their exit?
Jonathan Massing (JM): “Often people get caught up in running their business and not doing that any more seems like such a long time off that exit planning just isn’t a priority. Some owners don’t appreciate how exit planning can be key to ensuring the best outcome. In some cases, owners get an unexpected offer for their business, which they accept, without having planned to exit.”
What can go wrong if an owner fails to plan for their exit?
JM: “If they sell, they might get less. For example, they might not give themselves enough time, which can mean they sell at the wrong time or stage of the business’s development or market conditions may not be as favourable as they could be.
“If you have to sell at short notice, the profitability and performance of the business might not be as attractive as it could have been if a planned approach had been taken. If you know when you want to exit your business, you might be able to win contracts that enhance its value. From a personal point of view, owners also should plan for their own tax liabilities, of course.”
Is selling the business the most likely exit option?
JM: In many cases it is, although sometimes businesses merge with others, or succession happens in family businesses. If a buyer cannot be found, the business will need to be wound down, which should still be planned for.”
Should exit planning be a key priority for all business owners?
JM: “Yes, business owners need to think about the future. You should know when or by what age you want to exit; then you can plan to get the outcome you want. Sound planning can help to maximise your returns. It’s also wise to plan for unexpected events or occurrences, such as ill health. If you don’t plan, you may not be able to sell your business.”
Is the process difficult?
JM: “Exit planning is relatively straightforward. You either set a deadline by which you plan to exit and decide how that will happen or you set a trigger that tells you that it’s time to sell your business. If you plan to sell, you need to think about who would buy and how you can maximise the sale price. Your exit plan should be written down and reviewed and updated where necessary.”
How do businesses prepare for sale?
JM: “Usually they focus on minimising costs, to improve the business’s underlying profitability. It can also involve negotiating and formalising important commercial arrangements or contracts with key suppliers or customers; and ensuring that key employees are properly contracted so they remain with the business post-sale. Sometimes there can be legal issues to resolve, for example, commercial property leases that have ended or there might be outstanding claims or contingent liabilities, which are best dealt with before the business is put up for sale.”
What common mistakes do owners make when exit planning?
JM: “They underestimate the time it takes to sell their business or how distracting it can be. Often this makes it difficult to focus on day-to-day running of the business. The more upfront planning that can be done, the better, because it can lessen the impact on business performance and sale value.”
What key advice do you offer to a business owner who hasn’t yet created their exit plan?
JM: “Firstly, make it a priority – and devote enough time and energy to it. Consider what outcomes you want and when – set deadlines. Also think about who might buy your business; most transactions are between businesses that know each other. Leave yourself enough time to properly plan for your exit and seek advice from an experienced exit-planning adviser. There will be a cost, but it could be well worth it.”