When you start a business you might not be thinking about how it ends – but you should be.
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An exit strategy is a key element of any business plan. This helps you determine how your relationship with the business, and that of your investors, will finish. It can have a dramatic impact on your future financial situation. You need to be thinking about your exit strategy from the beginning.
If you are seeking investment, you need to give a clear picture of how people will ‘realise’ their investment – but you should also be considering how your own involvement might end. Here we run down some of the most popular exit strategies for small businesses.
There are around 3 million family businesses in the UK, according to figures from the Institute for Family Business (Editor’s note: this figure has increased to 4.8 million in 2018). These firms are part of the backbone of the UK economy, and some of them have been around for five centuries.
Many people wish to pass their business on to a family member. Often, entrepreneurs want to feel that they have kept their achievement in the family, and they wish to see its benefits enjoyed by those closest to them. Family succession can, however, be a fraught and complex process. You need to make sure that the succession is properly managed in order to avoid the many potential pitfalls. Read more in our guide to family business succession.
Often, investors will make investments on the assumption that the company with which they are dealing will eventually be acquired by another business. This is a very popular exit strategy both for investors and for business owners.
There have been many very high-value acquisitions in the tech sector in recent years, as we explored in our recent infographic. This infographic illustrates one of the key advantages of acquisitions as an exit strategy: the value of your business is simply what it is perceived to be by the organisation acquiring it. In the tech world, huge acquisitions have been made of companies with comparatively few assets other than great brand equity. Acquisition is therefore a very attractive proposition for agile, exciting businesses with high growth potential – or, indeed, for businesses that are posing enough of a threat that their competitors want to buy them out.
An initial public offering, or stock market flotation, is a route that is only open to very high growth businesses, but it is a potentially very lucrative one. In this arrangement you issue shares, which are tradable on a stock market like the London Stock Exchange. Successful IPOs require you to build up significant interest in those stocks, and the outlay can be significant; legal fees alone can run to hundreds of thousands of pounds. However, for businesses in the right position, an IPO can be a very powerful tool – as evidenced by the news that online giant Alibaba, a representative of which joined our recent live discussion, is planning a flotation (Editor’s note: Alibaba floated on the New York Stock Exchange in September 2014).
Finally, you should remember that there is no obligation for your business to carry on. All things must run their course, and sometimes entrepreneurs would prefer to wind the business up than to see it continue. In this case, your assets will be disposed of and used to pay your creditors, and the remainder will be split amongst shareholders. This can be an excellent option for entrepreneurs looking to make a clean break.