Why do business owners need an exit strategy?

The headline reveals a worrying statistic. However, with 20% of businesses failing in year one, and 50% failing within the first five years, it’s hardly surprising to see planning an exit strategy isn’t the forefront of business owners’ minds when success itself is such a tough nut to crack.

What is an exit strategy?

An exit strategy is an entrepreneur or business owner’s plan for how they will sell their holding to other investors or another company. This could be part of the business or all of it. Either way it gives them the opportunity to raise capital for their next deal or to support them through the next phase of their life.

Exit strategies can be complex and it’s worth thinking about:

• How much is the business valued at?
• How long will it take to sell?
• What are the tax implications?
• Do you have the right people, skills and expertise within the business to step down?

To answer these types of questions can take time, so it’s important to plan ahead.

What are the challenges that face business owners right now?

Being an entrepreneur or small business owner is no easy feat. They often face financial pressures and a lack of resource in the early days, so ensuring more money coming in than going out is the main priority. In fact, 21% of participants from the survey detailed ‘seeing the business failing’ as their biggest concern.

The last few years have only drawn a line under the above for entrepreneurs and business owners. A challenging macroeconomic background, with rising interest rates and inflation, have added an extra layer of uncertainty impacting the bottom line for lots of small companies. This has, ultimately, and understandably, led to lots of UK companies putting any plans for business exits and succession plans on the back burner.

In our research, one in five entrepreneurs and businesses owners said a valuation downgrade due to current environment as their biggest concern around business exits and succession planning.

There’s also the emotional element to consider – especially for family-run businesses.

Lots of entrepreneurs and business owners have built the company from the ground up. From the initial idea, to bringing the product or service to market, to eventually making a profit (hopefully!). It’s like raising a child, and that can make it very difficult to let the reins go – regardless of how much the business is worth. Uncertainty around succession and the future of the business can impact your ability to put a good exit strategy in place.

Why having exit strategy is important

1. You could lose out on business opportunities

At some point entrepreneurs in particular will be thinking about their next opportunity. But without releasing the capital you’ve invested and created in your current business(es), you could find yourself losing out on opportunities or resorting to short-term funding.

For other business owners, who might be hoping to extract equity to fund an early retirement, a lack of planning could leave you tied to a business for longer than you had hoped.

2. You need to feel the business will be well looked after

Succession planning can be particularly important for small family-owned businesses, things like restaurants and coffee shops. Lots of these business owners would be proud to pass the enterprise on to their children. However, they could have different career aspirations, so might not want to take over the day-to-day running of the business.

3. You might finding yourself leaving it until it’s too late

As we approach the greatest wealth transfers in history, where baby-boomers look to pass on their assets, it’s essential for business owners to prioritise getting their ducks in a row. There are roughly 750,000 UK companies where 50% of the company’s directors are over 60-years old – many won’t yet have an exit strategy or succession plan in place.

At Charles Stanley, we believe employing an expert to guide entrepreneurs and business owners through the process could be a worthwhile investment. The future might be uncertain, but that doesn’t mean it’s unmanageable – success depends upon previous preparation.