As a business owner, the idea of exiting your company may seem like a distant dream, especially when you’re focused on achieving success and growth. However, planning for your eventual departure is a critical step that should begin long before you’re ready to leave. According to Michelle Geraghty, Business Development Head at FNB Business Advisory, a successful business exit is a two-step process that requires careful consideration, preparation, and execution.
“Exiting your business is almost always a very emotional decision,” Geraghty says, “and to avoid those emotions clouding the decisions that need to be made about the exit, it’s vital that the ground has been thoroughly prepared well in advance.”
Geraghty explains that preparations can be extensive and will differ from business to business. She emphasizes the importance of involving trusted advisors early on. “It’s essential that you have relevant discussions with trusted advisers, particularly your bank and a legal adviser,” she advises, “so that you can put together a clear picture of your options and, as importantly, weed out the ones that don’t make sense for you or the business.”
Stress-testing every aspect of the business is another crucial step that Geraghty highlights. “You need to make sure that you have thoroughly stress-tested every aspect of your business, as a failure to do so could force you to change the plans you have for your exit down the line,” she says. This includes reviewing legal documents and ensuring that the business’s governance structures are robust and adaptable to change.
When the groundwork has been laid and the business is ready for the owner’s exit, Geraghty says that there are several strategies that can be considered, but the most common of these are:
- Sell the business outright – One of the most straightforward options is to sell your business outright. However, it’s crucial to approach valuations with a realistic mindset. “Business ownership is highly emotional, and this can taint your estimation of the business’ value,” warns Geraghty. “You need to be realistic about what financial gain you can unlock when you sell.” To ensure a fair valuation, she encourages discussions with various stakeholders, including lawyers, shareholders, your auditor, and your bank. “FNB offers a specialist advisory team that provides honest and transparent information about market trends and current prices for similar businesses,” she explains.
- Phased exit – If your business has a strong balance sheet, a phased exit may be a viable option. This strategy involves the business paying out the balance of a large loan account to you, the departing owner, over a period of years. This can be accomplished through financing or dividend payments. A phased approach offers benefits such as limiting your tax liabilities in a single year and minimising the impact on the business’s finances and cash flow.
- Partial management buyout – In this scenario, senior management members purchase a portion of shares from the major shareholder, providing them with cash to invest for retirement. This strategy also presents an opportunity to include an element of employee share participation, further strengthening the business’s future.
- Private equity – This can be an effective option for a partial exit, particularly if your business has strong growth prospects. There are various ways to structure this, including partnering with your bank if they have private equity mandates in place, as FNB does. Selling shares to a private equity fund can be an effective way to extract value from the business upon your exit.
Irrespective of the option a business owner chooses for their business exit, Geraghty emphasises that prudence and patience are always prerequisites for success. “Be sure to fully consider all your options,” she says. “The array of exit strategies available might be tempting to sift through quickly, especially when an owner is eager to move on, but each option has its own implications for the future of the business and its stakeholders.”
She also highlights time as a significant factor in the transition out of business ownership and warns against hasty decisions, “It’s highly unlikely that you will be able to wake up one morning and decide you want to exit your business and have completed the process in a week’s time.” The reality is that a proper business exit is a marathon, not a sprint, requiring patience and meticulous attention to detail.
She also cautions against listening to casual advice. “What worked for your friend’s cousin, is not guaranteed to be the best option for you,” she notes, so thorough research and consultation with experts are indispensable.
From a succession point of view, she cautions business owners with exit plans to recognise that that personal dreams for the business may not align with those of potential successors. “You may have had a vision of your daughter taking over when you’re ready to retire, but her dream may involve moving to Bali and becoming a dive instructor.” She says that engaging in frank and open conversations with successors early on can help clarify these points and prevent misunderstandings and exit delays later.
Ultimately, Geraghty’s overarching advice is to approach exiting a business with the same care, dedication, and scrutiny as when you first started it. “Take the time to evaluate each exit strategy on its merits, do the hard work, and seek out diverse perspectives,” she says, “and you’ll be best positioned to make a choice that will not only honour the legacy of the business, but also ensure that it has a future aligned to your aspirations when you first established it.”
INFO SUPPLIED.
