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COVID-19 is an important reminder of the need to have a business exit strategy.
How to exit a business
14 October 2020
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3 minute read
Just as the Skyhooks sang ‘Ego is not a dirty word’ in the 1970s, business exit should not be considered a dirty word either. Having a business exit strategy is as important as having an operational strategy and should be talked about from the establishment of a business.
Exiting a business is not an admission of failure. No one should think less of a business owner who exits their business – at any time, but especially given the challenges presented by COVID-19. Exiting may well be the best decision for the owners, the business and staff.
However, the business is performing, the owner should have an exit plan in mind. This increases their chance of exiting the business in the way they want and when they want, maximising the benefit for them. Business owners typically have one chance of getting their exit from a business right.
The decision to exit a business may be easy or confronting depending on the owner’s circumstances. If they are operating a small business, they will most likely have poured significant amounts of money, time and emotion into their business. It may be difficult to imagine life without it. On the other hand, if their life as a business owner has caused more stress than joy, they may embrace the thought of relinquishing this role.
Regardless of the owners’ reasons for exiting a business, planning the exit to maximise the business’ value will be one of the most important business decisions they make. Business owners will improve the success of their exit if they seek professional advice throughout the life of the business, not just when they want to exit.
Business exit most commonly involves:
- business sale
- transferring it to a relative or key employee(s)
- closing the business
- liquidation
If the owners wish to sell the business or merge with another business, planning the sale or merger will be critical. Typically, owners will obtain better value by selling the entire business to a new owner, as they will obtain not only value for their assets less liabilities, but also value for the goodwill. Potential buyers typically look for a business that is profitable, easy to manage, low risk and has good cash flow.
Long term planning will allow the owners to maximise the return on their investment, make the sale less time-consuming, attract buyers who will support the business and its employees, and achieve their financial and non-financial goals.
If the business is a family business, the owners may wish to pass it on to a member or members of their family or key employee(s). Succession is often an emotionally charged process that requires planning and collaborative effort between the owner and family members to succeed. It is important to have a succession plan that all parties agree to.
Generally, a family succession plan will have two main features:
- Transfer of power – how will the management and control of the business be transferred over to the family member(s), and over what timeframe?
- Transfer of assets – how will the wealth concentrated in the business be transferred to the family members, and over what timeframe?
The business owner and successors will benefit from seeking professional advice on creating a succession plan (including formalising the role of the older generation should they remain connected to the business) and ownership structure for the business.
For some business owners, the best option may be to close the business’ doors, sell its assets and pay off debts, retaining any surplus cash. This may be the case where the business is intimately connected to owners and without their skills, there is no business.
Business owners who are on top of their financial situation and act early and quickly when they find themselves in financial difficulty will have more options available to them. Not knowing there is a problem, or not acting when they discover a serious financial problem, can lead to liquidation being the only exit option available. In some cases, the decision to liquidate will be made for the owner.
CPA Australia’s advice for accountants is to encourage your clients to seek professional advice on an exit strategy for their business early, write up such a plan and build it into their business goals, and review it periodically or if the business undergoes significant change.
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