Exit stage right?

IN the lifecycle of a business, there will be pivotal events including acquisitions, disposals, mergers and exits. All are challenging but the final - and arguably most important - event is the exit.

There are three broad exit options: handing on to the next generation, the sale of a business or closure. Each has its individual combination of risk, reward, complexity and angst. However, they all cast the spotlight on business performance, the owners and the management team.

The earlier that business owners consider exit and succession options the better. Clarity around the future directs many key decisions that have to be made when running an organisation. Ensuring that all shareholders are aligned to the exit route is critical, even though this may take time and tough discussions.

If the business is to be passed on to the next generation consider whether there are able family members to hand over to, how key roles will be filled and what development plans may be needed. Perhaps external appointments would be better? It is also important to look at how responsibility and control will be transferred and how the current owners will extract the value of their capital.

When it comes to a business sale, the main options are via an initial public offering (IPO), either to a financial/private equity house or via a trade sale. This could also be presented as a merger, either to an associate such as a group of employees, including a management buy-out, or to a private buyer.

A leading Scottish law firm noted that around three quarters of business sales were triggered by an unsolicited approach. Whilst this sounds like good news for owners looking to sell, it's unlikely that the organisation is in the best shape to secure the best price.

Factors that have a negative impact on business value include the lack of a clear, articulated and implemented strategy. An inability to demonstrate consistent financial performance, along with complex and hard-to-unravel ownership structure with negative tax implications, are also damaging.

A strong management team is particularly important for a successful exit. Very often former owners remain tied to the business post-sale, as too much of the value of the business is wrapped around them as individuals.

This can be a very difficult time for all concerned. The former owner is no longer the decision maker and has to conform to the strategy and demands of the buyer, meanwhile the buyer can end up with an unmotivated and uncooperative key employee.

A business exit is likely to be a once-in-a-lifetime experience for most owners and it makes sense to get professional help as early as possible. By putting in place a succession plan and a strong, empowered management team, owners are more able to minimise their ongoing involvement with the business post-sale.