Know your options on exit strategies, SMEs warned

Know your options on exit strategies, SMEs warned

A business exit advisor is urging owners to become more aware of their options for leaving their business, saying there are more options available than many realise – each with their own pros and cons.

According to Kerry Boulton of The Exit Strategy Group, an exit strategy is influenced by many more factors than simply the will of the business’ owners to leave.

“When you decide to exit your business, it can mean many different things to different people. It will depend on what you want to achieve and what you want to do after you leave the business and what your current situation is,” she said.

“To add to the complexity of the decision even further, the best exit strategy may also depend on your personal and financial circumstances and that of other stakeholders.”

Ms Boulton said that as a starting point, business owners should ask themselves these three strategic questions:

  1. Do I want to stay solely focused on growth or do I shift focus to the exit?
  2. Have I explored ALL my options?
  3. Am I ready and is the business ready?

These questions will help to determine which of the many ways to ‘cash in’ on a business’ value is the right way to go.

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There are eight methods available to business owners, according to Ms Boulton, split between “inside” and “outside” options. However, IPOs are generally not seen as an effective option for SMEs, and so tend to be discounted for these sized businesses.

Inside options

1. Transfer to family

Pros:
• Keeps the business and family together.

Cons:
• Family dissension could occur with potential for anxiety about unequal treatment among siblings.
• Usually the family cannot afford to meet a large cash payout so the selling family member will have to live with payment over time and any associated risk.

2. Transfer to your management team

Pros:
• The business stays in the “extended family”.
• The management team knows the business and can do a good job of selling its merits to a lender or equity investor.

Cons:
• You may need to provide a form of vendor finance if there are insufficient assets that can be leveraged through other financing.
• Some of your equity stays in the business until management can earn enough profit to pay off what they owe you.
• Your loan will always be subordinated to any bank finance.

3. Sell to your existing partners if you have any

Pros:
• A fellow shareholder knows the business and does not have to be convinced of the prospects and value.
• You are dealing with a buyer who is willing to purchase shares, rather than insisting on an asset transaction.

Cons:
• If your shares are sold to other shareholders and you have a poorly prepared shareholders’ agreement, its terms may force you to accept a price that is not reflective of the company’s fair market value.

4. Sell to your employees (ESOP)

Pros:
• A fellow shareholder knows the business and does not have to be convinced of the prospects and value.
• You are dealing with a buyer who is willing to purchase shares, rather than insisting on an asset transaction.

Cons:
• Can be complex and expensive to set up and maintain.
• Generally only suitable for a gradual exit over time.
• Significant regulatory and legislative burdens.

Outside options

1. Sell out to a third party, such as a strategic buyer

Pros:
• Usually receive a majority of the purchase price in cash at the time of closing the sale, although some may be held back and subject to performance outcomes under new ownership.

Cons:
• If you want to stay on after a sale to a third party, you may suddenly find yourself in the role of an employee rather than owner. This is often difficult.

2. Recapitalise the business

Pros:
• You maintain an equity interest in the company and can participate in its future growth.
• You can take some money off the table and diversify your risk into other forms of investment.

Cons:
• If debt is used to create liquidity, the increased leverage may make the company’s future performance riskier.
• If debt is used, the lender may require a personal guarantee from you which does not accomplish your objective to diversify your risk.

3. Orderly liquidation

Pros:
• The process is fairly simple and fast.
• The entire company does not have to be liquidated. The owner may decide to liquidate only a portion of the company and keep the more profitable parts.

Cons:
• Liquidation usually results in the lowest possible value for a business because it reflects the fair market value of the assets with no consideration for the intangible assets of the business such as client or customer lists, employee knowledge, name or reputation, or any of the other intangibles.

 

Know your options on exit strategies, SMEs warned
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