A successful exit is often the ultimate ambition for founder-led businesses – but achieving it can be tough. Charlotte Hinchcliffe, managing director of Harold Sharp accountancy, provides insight on the fabled SME-owner exit and five key factors that can impact the chances of reaching it.
Achieving a successful exit is a common end-goal for a founder, but there are pitfalls to navigate and treating it as a distant milestone is a mistake. Preparing for an exit isn’t a project you start when you decide to sell, it’s a mindset that must run through your business – particularly your finance function – from day one.
Over the past 12 months, we’ve seen an increase in founders exploring ownership transition – and considering their route to an exit. Some have been in preparation for years, whilst others have been caught off guard by an unexpected approach from a potential buyer. For those with an ‘exit ready’ mindset, the timing almost becomes irrelevant. With clean financials, strong leadership and scalable systems, you can create your own options.
There are five key factors for exit readiness to consider, which can help build a tempting proposition and avoid a prospective sale collapsing at the final hurdle.
- Make the financial picture clear
Your business may have been running well for decades, but you must be prepared for a new level of financial scrutiny when it comes to a sale. Having comprehensive management accounts in place can be a crucial part of this.
Not only do your monthly or quarterly management accounts demonstrate to a prospective buyer that you have a grasp of your numbers, together with live forecasts and transparent reporting, they create a valuable decision-making tool in your day-to-day.
A business that knows its numbers inside out can spot risks earlier, adapt strategy faster and seize growth opportunities quickly. If this is baked into the DNA of your business, it becomes attractive to a buyer, rather than reactive to the selling process.
- Refocus your roles
For a founder with sights on an exit, working ‘on’ the business, rather than ‘in’ the businesses is an important step. By this, we mean that founders who are consumed by the day-to-day operations of the business are at risk of capping their value. Buyers are looking for proof that the business can thrive without you playing the core role, and it’s important to note that your team will be looking for the same reassurance.
To action this effectively requires a shift in mindset, and most importantly delegation. Having a strong and trusted management team and advisory board in place is key, allowing for delegation of responsibilities and a move from an operational role to leadership. This shift requirement isn’t just an ‘exit ready thing’, it is critical to providing you with time to think strategically and strengthen culture. Almost incidentally, your business is likely to start getting noticed by potential buyers along the way.
- Keep your exit options open
You could find yourself at a crossroads between an external sale, or an internal one. Structuring for the future now will help to keep both choices on the table.
One option to consider is incentivising your team through employee trusts and share schemes. Having structures like these in place will ensure that the business remains attractive to your team – whether through eventual ownership or by sharing in the value of an external sale.
- Readiness protects value
You can be expected to provide the standard three years of accounts, but we have seen up to five years requested depending on the size of your buyer. This was the case for two UK-founded SMEs we recently supported through the acquisition process – both in niche industries, who attracted the attention of major international groups. They were well-positioned to secure the result they wanted and to proceed in a timely manner.
This is not always the case, and too often compliance gaps, messy financials or unclear ownership structures can become bargaining chips for buyers. By adopting robust processes, you have the measures in place to protect your valuation.
- Know what you want
Turning your business wealth into personal wealth is going to be fundamental to the viability of an exit. You may find a gap between what you need – and what you can realistically achieve.
Business valuation is a crucial factor here. This can be complex, and its calculation will be impacted by the nature of your business. Having an incomplete financial picture, inaccuracies in the balance sheet, or issues with your compliance history can impact your value and ultimately the sale.
Personal tax planning will play a big part too. Rates for capital gains have soared in the UK recently and changes to entrepreneurs’ relief are impacting business owners. Your tax liability could differ hugely depending on your exit route, time-period and what’s included in the sale. For example, you may decide to bring certain assets, such as a business premises, outside the scope of the sale.
The myth is that exit readiness only matters when you’re selling. The truth is, being exit ready is business readiness – and needs to be an intrinsic part of an SME. Being prepared for the ambitious journey to a successful exit is key to making it a reality.
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Charlotte Hinchcliffe is managing director of accountancy firm Harold Sharp