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29th May 2012
An exit strategy is simply a transfer of ownership from one party to another and whether or not you need one will depend on a whole host of factors. For example, if you are a business funded by external capital, these investors will be very keen on an exit at some point as a means to liquidate their investments. They will expect your business plan to contain an exit strategy outlining things like; potential acquirers, desired time frames and a target exit valuation.
However, if on the other hand you are running a family business it is often prudent to pass it from generation to generation, and as long as the demand for the product or offering can be served profitably there may be no compelling reason to plan an exit. If this is a likely course of action it is important to have a succession plan in place a few years prior to the transition to ensure that the successor has the necessary skills and acumen to take over when the managing director calls it a day.
Finally, if you are starting a business and not dependent on external capital it may seem like the last thing on your mind. However, there is no harm in having a good sense as to who your potential acquirers may be over a 3- 5 year term as that can help shape decisions you make as your business develops and grows. That said, if your aspirations are to grow the business year-on-year, your aims will be aligned with those of any potential acquirers.
Regardless of the particular circumstances for your business it is important to recognise that, all business is cyclical and it is always worth considering what exit strategy is best for your particular business. External forces can play a huge role in the attractiveness or otherwise of a particular industry sector and it is always important to keep abreast of developments which can impact your business down the line. Similarly from a purely financial perspective, cashing out is generally very prudent unless you are at the start of your career or business cycle. Any time you have a willing suitor interested in acquiring your business it has to be given due consideration. You will need professional advice to assist with the valuation process, to ensure the deal is structured in a tax efficient manner and to ensure that any due diligence is reasonable. You will also be advised to have full sets of audited accounts as these will form an important part of the valuation process (which essentially will boil down to some subjective views as to a range of multiples to apply to revenue, free cash flows or EBITDA).
Arriving at an agreeable valuation will typically form the core basis as to whether or not a transaction is likely to proceed.
It is of course advisable to plan all of this well in advance of retirement age so as to reduce the risk of not being able to exit, as well as having an opportunity to choose a preferred course on your own terms. Any prospective acquirer can behave opportunistically and force the acquisition price down if they sense that you are in a hurry to exit.
Alan Gleeson is the Managing Director of Palo Alto Software Ltd, creators of LivePlan and Business Plan Pro. He holds an MBA from Oxford University and is a graduate of University College, Cork, Ireland. Follow Alan on Twitter @alangleeson