One day, by whatever means, you will exit your business. Preferably you will still be alive and in control when this happens.
The most common strategies are:
- Trade sale
- Private equity
- Management or employee buyout
- Transfer or sale to the next generation
- Voluntary liquidation
Trade sales can include customers, direct competitors, or organisations within your industry wishing to expand their product or service range. No-one is going to pay you for your business if you make it cheaper and easier for them to poach your employees, steal your customers, or copy your ideas. Creating great value means you need to ensure your business is an investment not a lifestyle option. Profiling would-be buyers and adapting yourself accordingly will certainly make a difference as to whether you manage to sell your business; it may also be a key driver in increasing the value of your business many times over.
There are ways to manage a staged transition and payment terms, but history is littered with examples of people falling out after the deal. Get some rock solid advice as to how to protect your interests (especially your Intellectual Property Rights) during any earn-out period and always have a plan B.
Only some businesses will be large enough to attract private equity, but if you are in this fortunate position, the buyers will usually be looking for a business that has a defendable market position, with sustainable earnings, and is scalable, with identifiable growth opportunities.
Management and employee buyouts have been around a long time; but using the Co-operative structure to facilitate employee buyouts is a more unusual and exciting route. Co-ops offer financial and operational advantages, are statistically more resilient to economic uncertainty, and operate in an exceptionally benign tax environment.
In addition to entrepreneur’s relief on capital gains and business property relief on the transfer of a qualifying enterprise, Co-ops can also be used to hand down a business to the next generation within an overall “family office” type structure.
Finally, you can follow the route of 18% of privately owned businesses and simply close the doors and cash in what’s left, but get advice about how to take advantage of the rules surrounding capital distributions. You don’t want to be taxed on the resultant cash as if it were income.
Now for a warning – your business may be worth less than you or rose-tinted spectacle-wearing business brokers think.
None of the above exits will give you optimum value if the business is wholly dependent on you – it needs to be systemised so that your successors can run it every bit as well as you. Read Michael Gerber’s “E-Myth” and all will be clear. Running your business is one thing but designing an enterprise which is an attractive investment is where the real wealth is generated. Whenever you get a chance, work on, not in, your business making sure that you and your advisors, especially those with experience of running their own businesses, focus on making relentless incremental improvements, thereby increasing the capital value of your enterprise. The effect on value can be tracked on a regular and scientific basis.
You only get to exit your business once – make the most of it, if only for your family’s sake.
Andrew Fisher
