Is An Exit Strategy Part of your Plan?

ETF Research & Analytics Team

ETF Research & Analytics | A function of the ETF corporate think tank.

Over the course of the past six months the ETF has conducted an exclusive survey over small to medium enterprise in terms of being equipped and timely on having an exit strategy. The following report dives into the outcome of the most successful and relevant issues to tackle as an SME to have an efficient exit strategy. Creating an exit strategy for a small business is a critical aspect of business planning. It provides a roadmap for business owners to maximize their return on investment and ensure a smooth transition when it's time to sell or close down their business. Here's a detailed analysis and advice on how small businesses can make a leap into a successful exit strategy.

Start Early and Plan Ahead
Exit strategies should not be an afterthought. Ideally, they should be part of the initial business plan even before the business is operational. This helps in aligning the business objectives and daily operations with the desired exit strategy.

Understand Different Types of Exit Strategies
There are various types of exit strategies, and choosing the right one depends on the business owner's goals. These include:

Selling the business to a strategic acquirer: This can be a larger company in the same industry that can benefit from the synergies.
Selling to a financial acquirer: This is typically a private equity firm that is looking to invest in businesses with strong growth potential.
Management buyout: The company's management or employees buy the business.
Initial Public Offering (IPO): Although rare for small businesses, an IPO can provide a significant financial return.
Liquidation: This involves selling all the company's assets and closing down the business.

Build a Strong Management Team
A strong management team can be a key selling point when it's time to exit the business. Buyers are more likely to pay a premium for a business with a well-functioning team that can continue running the business after the owner leaves.

Focus on Sustainable Growth and Profitability
Businesses that show a track record of consistent growth and profitability are more attractive to potential buyers. Therefore, it's essential to invest in activities that drive long-term growth, such as new product development, market expansion, and customer retention strategies.

Keep Financial Records Clean and Organized
Potential buyers or investors will conduct a thorough due diligence process, which includes reviewing the company's financial records. Therefore, maintaining clean, organized, and audited financial statements is crucial.

Consider Business Valuation
A professional business valuation can provide a realistic estimate of what the business is worth and help set expectations for a potential selling price. The value of a business is typically based on its assets, cash flow, market conditions, and comparable sales in the industry.

Hire Professional Advisors
Exiting a business is a complex process that involves legal, financial, and tax implications. Therefore, it's advisable to hire professionals like lawyers, accountants, and business brokers who can provide expert advice and help navigate the process.

Be Flexible and Patient
Exiting a business usually takes longer than expected. It's important to be patient and flexible during the process. Negotiating the best deal often involves compromise.

Strengthen Your Customer Base
A strong and diversified customer base is a valuable asset when it comes to selling your business. Companies with a large, loyal customer base are more attractive to buyers because they represent potential future sales. Implement strategies to retain existing customers and attract new ones. A diversified customer base can also protect the company from the loss of key customers.

Protect Your Intellectual Property
If your business has developed unique products, technology, or brands, make sure you have protected these assets through patents, trademarks, or copyrights. Intellectual property can significantly increase the value of your business and make it more attractive to potential buyers.

Create Standard Operating Procedures (SOPs)
Having well-documented SOPs for all major processes in your business can provide a smoother transition when you exit. This can reassure potential buyers that the business can continue to operate effectively without its current owner.

Identify Potential Buyers Early
Start identifying potential buyers early. These could be competitors, suppliers, employees, or customers. By identifying potential buyers early, you can start building relationships and gauging interest, which could help speed up the sale process when you're ready to exit.

Develop a Succession Plan
If you're planning on a family succession or a management buyout, start preparing your successors early. They should be involved in strategic decisions and understand all aspects of the business. This can provide a smooth transition and continuity for the business.

Enhance Business Efficiency
Improving operational efficiency can make your business more valuable. Look at your business processes and identify areas where you can reduce costs or improve productivity. This could involve investing in new technology or retraining staff.

Mitigate Risks
Businesses with lower risk are more attractive to buyers. Identify potential risks in your business and implement strategies to mitigate these. This could include diversifying your supplier base, investing in cybersecurity, or ensuring you're compliant with all relevant regulations.

Cultivate a Strong Online Presence
In today's digital age, a strong online presence can boost your business's value. This includes having a user-friendly website, active social media accounts, and positive online reviews. Buyers will look at your online presence as part of their due diligence.

A successful exit strategy requires long-term planning and strategic decision-making. It's about building a strong, profitable, and sustainable business that's attractive to potential buyers. It's also about being prepared for the transition and ensuring that the business can continue to thrive without you. Remember, an exit strategy is not just about exiting the business; it's about maximizing your return on the time, money, and effort you've invested in the business.