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Why it’s important you plan your exit strategy before you start your business

October 21, 2014

Starting a new business is fun. It’s a world of learning and discovery as you set out on your own and try to build a brand new business from scratch.

Many people are so caught up in building their business that they don’t really consider where they want it to go in the long-term. And very few people are forward thinking enough to plan the finish – their exit strategy – when they are starting up.

Yet it’s an essential part of your start-up planning. Not only will there have to be a day when you walk away from the business, but when you know where you ultimately want it to go, you are much more likely to make the right decisions along the way.

Here’s why you need to plan your exit before you launch your new venture;

How you plan to exit your business affects how you run your business

Planning an exit strategy is about deciding what you want out of the business you are starting, and then executing it. If you know from day one that your ultimate goal is to sell your business to your staff, then that is going to affect the kind of people you hire and how you develop them.

Or, if you know that there is no business without you, then it means you can spend the final few years squeezing every drop of profit and cashing in assets.

It’s sensible to put your exit strategy in your business plan and review it annually. That way you can ensure the business is on track to achieve what you really need from it.

If you are already running your own business and don’t have a plan to get out, it’s not too late to write one now. Like anything in life, once you have decided what you want and made a sensible plan for it, the chances of it happening are much more likely.

Work out what you really want from your new business

The first step is to decide what you want from your business. And that doesn’t just mean financially. Why are you starting up in the first place?

Do you just want to be your own boss and not have to answer to anyone else? Do you want to be a millionaire? Do you want a specific lifestyle, or fancy making a load of cash quickly and then retiring to enjoy it?

Your start-up reason will affect what you can do with the business in the long-term. A business that gives you a regular wage and great lifestyle might not be something you can sell as a going concern. Whereas a business that demands attention from you day and night for five years may be the one you can sell for a million.

The key thing is to look at what your business does and whether someone else would pay for it. If your customers primarily buy you, then there is no business to sell when you are not involved. But if they are used to buying from your premises, website or brand, that is a saleable asset.

Generally, businesses that make money through capital growth are the ones that have the most exit options. A high growth business in a thriving sector can look at trade buyers, mergers or maybe even a stock market flotation.

So what are the exit options open to you?

There are various ways you can exit from your business. Here are some of the more popular ways business owners can leave their venture;

Pass it on to your family

This is an attractive option for many people, especially if they have worked hard for much of their lifetime building up a business, and want to see the family continue to benefit.

Typically you will get a child or other family member to work in the business for several years before you leave. This is the best way to get excellent business continuity.

It’s worth bearing in mind as you make plans on behalf of your seven-year-old that they may have no desire to be “stuck” in the family business for all of their life! Get advice from people not involved with your family and have a back-up plan.

Sell your business

This is the most common exit option. You can either sell the business as a trade sale to an outsider, or to your own staff (often called a management buy-out).

If this is your desired exit route, you will need to start out as a limited company and make smart hiring decisions along the way.

If you are thinking of selling your business, you should read these ByteStart guides;

Merge your business

This can be a good way of ensuring your hard work continues after you have gone. However it’s not unusual for a business owner involved in a merger to have to remain with the business longer than they would like, to ensure good continuity.

Float your business

This is only really an option for businesses with a turnover of at least several million pounds. It’s a costly exercise to go public – some estimates put it at up to half a million pounds. And with annual fees of over £100,000 to maintain your stock market listing and pay the required advisers and brokers, it can eat into the profits of smaller companies.

You will be able to cash in some of your shares when you float your company, but other investors will want you to retain a significant stake in the business. The money raised will give your personal finances a boost, and will give the company a significant windfall to help with future growth.

Shut your business down

This is the most common outcome if your business is really based round you. It’s also what can happen if an accident or ill health forces an early retirement before you have prepared an alternative exit route. If it’s something you want to avoid, you must plan your exit before you start up.

Some of the key decisions you make when you are starting your business will affect your ability to exit. The business structure your enterprise operates under determines how easy it will be to sell.

Your exit strategy should shape which business structure you use

It’s much simpler to sell a limited company – which has its own legal identity – than it is to sell a business if you are a sole trader (self employed).

It’s therefore, important you consider your long-term exit plans when you are choosing which business structure to use for your new business.

It’s also worth being careful when you take on shareholders, get into long-term agreements on property or investments, or even take on work that is barely profitable just to keep your business busy. These kind of decisions can all come back to bite you, if they make your business less attractive to potential buyers in the future.

Further information

ByteStart is packed with help and tips on all aspects of starting a new business, start with some of our most popular guides;