Exit planning for small business owners
Exit planning for small business owners is a fairly uncommon scenario, so many coaches will not have a great deal of experience in it. Family-run businesses who want to hand over the reins, those looking to pursue other business interests or due to personal circumstances finding themselves needing to exit the business, are just some of the situations and briefs our coaches at UK Growth Coach have worked on.
Much of the advice available to business owners about exiting a business is around the technicalities of selling or closing down a business. There is much less publicly available about how to get the business’ functions and operations into a position where an owner can exit the business, and exit the business in a way they want to i.e. selling it for a good price and/or knowing it will carry on being a functional and profitable business into the future.
Precursor to exiting...
To be in a position to exit the business, we are assuming it is no longer reliant on the business owner, as per the previous article. If that isn’t the case, the organisational and role mapping need to be undertaken along with succession planning, upskilling, developing the team and documenting all systems and processes needs to happen. If the business is reliant on the business owner, fundamentally there isn’t a business to sell – the business is the owner and you aren’t for sale.
A business at this stage of the journey is functional, it’s profitable and it’s got other people doing the main aspects of the operations.
Sometimes the business owner will still have chosen to be involved on an ongoing basis, whereby they are fulfilling one of the roles within the company. What will need to happen is that that role/job will need to be recruited for or succeeded by somebody else, efficiently – as with any member of the team leaving a business. Additionally, all of the responsibilities that the owner has as a director or a strategic steering party needs to be managed and succeeded successfully as well.
This means a focus on the development of the remaining leadership and management team, especially if there is going to be a management buyout (MBO).
Demonstrating the business is not reliant on the owner
For a successful exit plan of a small business owner, there needs to be a systemising out the aspects that are still reliant upon the owner or that still requires their input, in order to enable the remaining team to carry out those duties when the business is owned by someone else.
This needs to be done in a way that gives the team who will be taking this on both the technical capabilities but also the confidence to do it, because any customer who’s going to come and look at investing and buying the company from the owner, needs to be able to see for themselves that the business is not reliant upon the owner.
The more it can be demonstrated that a business is not owner dependent, the higher the value of the business most often.
This is particularly the case when it comes to the marketing and sales, the actual business drivers, alongside the relationships with clients. These are the aspects that actually prove the ongoing viability of the business, beyond any doubt, that the business structure and personnel can run a profitable business without the owner.
Understand what makes a business valuable to others
To prepare for a sale, a business owner needs to undergo some education on what makes a business valuable. There are a number of factors that go into the valuation of businesses, and this varies from industry to industry (e.g. store profitability and stock rotation in retail versus investment in R&D in manufacturing).
Understanding how the calculation is undertaken, what the multiples are and what numbers are important to prove, is very important because exit planning for small business owners, which involves selling the company, will have to provide a report with all of those details to any future investor and the owner will need to demonstrate how those numbers have been achieved and what systems are driving them.
If you can do that successfully, then you’re most likely to achieve both a higher number of potential investors, and the highest valuation possible. Ultimately, nobody wants to buy the business if the business is you, so you need to prove that it isn’t you, if you want to maximise that value.
Understand the mechanisms of a business sale
Prepare your reports and documentation for investors as they will want to see accounts in detail for the past several years, probably three or more. What the accounts ought to show, in an ideal world, is consistency in performance and growth. Investors will want to understand the breakdown of different departments, what’s profitable and what’s not. They want to understand the team performance so they understand what they need to budget for, and so on and so forth.
There will also need to do some future planning, and demonstrate the future prospects of the business too. This all goes way beyond your standard end of year accounts.
Exiting a family-run business
This actually happens more often than people think, and there are a lot of very successful family-run businesses whereby the older generations wish to hand over the reins of running and/or owning a business to younger generations.
The same rules apply about ensuring the business is independent of the current owner, and management succession and upskilling has taken place. The fact that somebody is a family member, versus any other employee, simply means the relationships are more complex, but the expectation of the role that each person is fulfilling should be identical whether they’re an employee or a family member.
The systemisation, self-discipline and training to ensure that the person who’s taking over that role is competent and capable, and the systems are there for them to follow and execute upon successfully, still need to be there.
In a family-run business handover, the current owner has the advantage of seeing the new owner in action and hand-holding if necessary for a little bit. This gives the existing owner confidence that they can step out and it also gives the new owner the confidence that they can perform.
Wise words on exit planning for small business owners..
A common theme throughout this Business Journey series has been the importance of having a clear and articulated plan, right from the outset as to the vision for the new startup business through to the plan for exiting.
It’s the planning in particular where an experienced business coach makes the difference between success and failure at reaching the next stage of a business’ journey, and the amount of pain (whether that be stress, time and/or money) each one causes the owner.
Having a coach who has experienced it, seen many different scenarios and situations, and is qualified in the necessary business skills you may be lacking in or have gaps in, provides owners with more time, more money and better team performance. The holy grail of business ownership!