What is the key to a successful exit?
How we can help you plan for a successful exit from your business.
As a founder or an entrepreneur, you will, sooner or later, look to make an exit from your business. In an ideal world, the exit will have been planned during the early life of the company as this is the best way to protect the future value of your business. The reality is however that it often gets overlooked.
Your plan should be focused on two main objectives:
maximising your company’s value prior to your exit; and
ensuring that you accomplish all your business and personal objectives as part of the exit.
Early exit planning helps you, the founder, because it impacts on so many of the strategic business decisions that need to be made during the lifecycle of the business – decisions on the legal structure and investment by way of example. A plan helps investors calculate the timescales and likely yield on their investment, and thus increasing your chances of getting the return you want.
The most common reasons why founders’ exits arise
Planning early helps founders get what they want out of the business even if it seems counter-intuitive. But you can’t plan for every scenario. Markets change, circumstances evolve, and exits arise for a number of reasons, the most common of which are:
Business success – in the most positive scenarios, the founder and their management team have built a company that performs well which might then attract interest from potential purchasers or allows them to market the company with a view to obtaining offers from potential purchasers.
Business synergies or opportunities – often, a competitor or a business in a similar field approach a successful management team as they see potential in the business that is being developed and with their more experienced management team or larger resources, they can see the future potential or extract more value out of the business.
Market uncertainty – if times get tough and the market is uncertain (perhaps due to new competition in the market or changes in government policy), a founder may decide that this is the right time for them to exit.
Business failure or lack of profit – if the business is struggling and despite help, things are looking bleak, a founder may decide it is their time to leave to limit losses
Personal goals – A founder might leave to pursue other goals, either because they no longer agree on the start-up’s direction or for other personal reasons. The characteristics of entrepreneurs often defines how they act – once established they want to move on to their next exciting project.
Personal circumstances – It is the reality that often, unfortunate personal circumstances force a founder to exit – things like illness, divorce or even death. This shows why planning is so important.
The different types of exit strategy for start-up founders
It is often said that companies are bought rather than sold which can be helpful in planning for an exit, ensuring that the business is in good shape. Strong and well-managed businesses have a few exit options.
Merger or acquisition
Merging with a similar size company or being bought by a larger company is a strong exit plan option for any company with their business for sale and can be a particularly attractive option for start-ups and entrepreneurs. You’ll be in control of pricing and be able to set your own terms and if you’re attractive to more than one bidder, this can push the price up.
Selling your business to your existing management team can be a quick route to liquidising your assets and means the business continues as a private entity. As the owner you could also keep a number of shares and reap some future benefit. Unlike an acquisition it does mean the business has some continuity with the same management and teams in place, and you’re leaving it in trusted hands.
Taking your business public is a big challenge – high regulatory costs and scrutiny from shareholders bring high stakes. Whilst private investors may see potential in your business, the wider industry may not. Also bear in mind that after an IPO, your own shares will usually be subject to a share lock-up agreement. This means you can’t sell them for a period of time, typically 6 months.
Sell the business on to a family member
You might be inclined to think that passing a business on to a family member is easier than any other exit, but it still needs careful planning. You don’t want the stresses of business life interfering with personal relationships. If you are keeping it in the family, it does mean you can stay close to the business, which can have its positives and negatives.
Liquidate the assets at their market value
Liquidation is the least attractive exit option as it brings the lowest returns of all the exit strategies. It is usually only used due to poor performance and when a buyer can’t be found.
The key considerations for founders in an exit
Early planning can of course help founders take all the right steps, including legal considerations in making a successful exit and ensuring the business is left in trusted hands. From a founder’s perspective, it is important to not only ensure you obtain the best deal possible in terms of monetary value, but also ensuring that you are protected from a liability perspective.
You may also be staying on with the business as part of the exit, whether that is for a short amount of time to allow transition, or whether you have agreed a longer-term engagement with the new owner. The terms surrounding this arrangement are a fundamental part of the overall deal.
Taking advice from a specialist company lawyer is important to ensure your business interests are protected. Here at Ignition, we are a corporate law firm with a difference, comprising of a team of experienced lawyers, spanning corporate law, specialist tax and finance law, alongside other high-quality lawyers in specialist fields, such as employment, IP and commercial law, which are integral to implementing the transaction. Many of them have worked in entrepreneurial industries themselves (or are indeed entrepreneurs so have first-hand experience) and have the skills to guide you through the exit process.
They can help with all the aspects of your exit plan – due diligence, drafting the necessary legal documentation, taxation matters, post-completion items, shareholders’ agreements, share structures and articles of association.