Starting up: consider your exit strategy

Carefully planning your exit from the business allows you the opportunity to:

• mould your business into the ideal shape for your chosen exit option - maximising the value you get from it
• groom successors if they're coming from within the business
• exit at a time of your choosing, when the business is doing well and the market conditions are advantageous

Ideally, you should include an exit strategy in your start-up business plan. You then have the option to review and revise it whenever you work on your annual business plan and budget - and you can steer your business in the direction that your exit option demands.

If you manage an existing business and don't have an exit plan, you might consider thinking about what your preferred exit option might be - and whether you could change the way you run your business to help you achieve it.

The way in which you exit can affect:

• the value you and other shareholders realise from the business
• whether you receive a cash deal, deferred or staged payments
• the future success of the business and its products or services
• whether you retain any involvement in or control of your business
• your tax liabilities

Decisions you make in the early stages that can impact your future exit include:

• Business structure - the legal structure you choose can restrict your exit options and affect how potential buyers view the business - for example sometimes it is easier to sell a limited company than a partnership or sole trader structure.

• Articles of Association - these set out the rules for running the company affairs. If they are too restrictive they could limit what the business can and can't do. This could put off potential buyers or investors who are looking to diversify.

• Partnership agreements - these may specify what will happen if one of the partners wants to exit the business, e.g. due to ill health, disagreement, or retirement.

• Property agreements - these can be difficult to get out of without suitable break clauses or the right to assign your agreement to another party.

• Shareholders - the involvement of shareholders with voting or preferential rights can make it more complicated for an outside investor or buyer to take over the business.

• Capital and ownership structure - straightforward structures can help make your business more attractive and can create a smoother route to sale.

• Accounting procedures - good accounts will give potential buyers and investors more confidence in your business and make completing the sales process easier.

• Employee/customer/supplier contracts - clear, simple contracts for all business relationships can help avoid disputes, clarify responsibilities, and make it easy for potential buyers to see what they would be taking on.

Passing or selling your business to a family member allows you to maintain an involvement in the business and pass the assets to your heirs.

You need to be certain that a family member will be interested in taking on the business and has the skills and ability to do so. If you're starting a business specifically to pass it on to family, you will need to involve them as early as possible and look at how you can support and encourage family members to consider their future in the business.

Allowing them to gain experience working in other businesses can be equally important, as this will give them a fresh perspective on your activities. You also have to consider if your plan is fair to all members of the family to avoid tensions.

A third party such as a non-executive director or business adviser can help you ensure emotions don't cloud your thinking and that your thinking is unbiased and logical. They can help you to answer key questions:

• Will family succession create potential for conflict within the business or family?

• Will it provide you with a financially secure future, or should you be considering other exit options to maximise your future income?

• Will it be tax-efficient?

• How will family succession affect the chosen successor's tax liabilities?

• How should you apportion shareholdings between the successor and other family members?

Read more about family businesses.

A common approach is selling your business to another business looking to make an acquisition - sometimes known as a trade sale. You may advertise your business for sale on the open market, or more discretely via an intermediary who may identify buyers who may be interested in acquiring a business in your market and location.

Sometimes as part of a deal, the owner and management team will need to remain as employees of the business for some time, to enable a smooth transition.

A merger may also be an option as a stepping stone to exiting a business, as the combined businesses may be more attractive to a buyer in future.

If you didn't start out as a limited company, it's worth seeking advice about whether incorporating the business could make it easier to achieve a sale or merger.

You could sell your business to the existing management team - known as a management buy out, or consider a wider form of employee ownership that enables all employees to have a stake in the business.

This gives you the opportunity to recognise and reward your management team and employees, and potentially enable a smoother transition that is might make it easier to preserve the culture of the business. This may be important to a business owner who has grown a business over many years.

This option may not be as profitable as selling to a trade buyer because your managers or employees might not be able to raise the same level of funds to buy the business.

You should also think about what might happen if your managers or employees make an attempt but fail to buy the business, and the impact if employees are disgruntled or demotivated as a result.

More rarely, larger high growth businesses may float - which involves selling shares on the stock market.

Any financial exit from the business is likely to be partial. Potential investors will be wary if you sell all your shares - and you may not be permitted to do so.

A float will also affect other existing shareholders or investors. The shareholders' agreement may give existing shareholders pre-exemption or voting rights which may make a float more difficult or reduce the amount you can realise.

Relatively few businesses can realistically expect to float as it requires considerable levels of finance to achieve the necessary growth for this route to be possible.

Closing your business isn't necessarily an option that's forced upon you by poor trading conditions or financial difficulties.

There are a number of circumstances where closing your business may be the most practical option:

• your business may be too dependent on your particular skills to make a sale realistic
• family members may be uninterested in taking charge
• unfavourable economic climate
• ill health may force you to retire before you have had a chance to develop the business sufficiently to make an alternative exit viable

It's important to seek professional advice about your options in such circumstances from your solicitor, accountant or financial adviser.

The way you close your business will depend on the legal structure you have chosen for it.

You should get in touch with the relevant authorities to advise them you are closing down and calculate and pay off any outstanding liabilities (such as VAT) and debts.

If you have employed any workers you will also need to give them the proper notice and any outstanding pay and benefits.

Find out more about closing or selling a business.