Exit planning being overlooked by businesses, says accountancy body

In the UK, fewer than 30% of businesses listed for sale actually find a buyer each year. Considering that the typical micro business is valued at around £90,000 to £100,000, this represents a significant amount of unrealised potential for retirement. Establishing a clear exit strategy is the most effective way to enhance the personal value of a business and secure financial stability for the future.

Insufficient planning leads to significant risk

Many business owners find themselves unprepared for selling their business due to poor planning, the struggle to manage daily responsibilities, and a lack of innovative thinking. In the UK, it's widely believed that about 60% of businesses lack any exit strategy. Among the 40% that do have a plan, only 10% have it fully formalised and ready to implement, while the remaining 30% have incomplete or informal strategies. This situation puts businesses in a vulnerable position against unforeseen circumstances such as health problems, family issues, stress, or even global crises as we’ve seen with the pandemic.

One major obstacle to leaving a business is the absence of a solid business strategy. Exiting a business isn't solely influenced by sudden changes. With more individuals aiming for a healthier work-life balance and considering early retirement, it doesn't necessarily mean that business owners are more equipped to step away.

Lack of proper planning can complicate a move, whether it's planned or not, leading to a loss of potential financial benefits. Many people overlook exit planning, thinking it's unnecessary or irrelevant. A common misconception among business owners is that they don't require an exit strategy, particularly if they find satisfaction in their work, maintain a healthy work-life balance, have financial stability, and enjoy their client relationships. However, neglecting to plan adequately can hinder a successful exit from their business. In the worst-case scenario, this could result in the inability to find a buyer or successor, ultimately forcing the business to shut down.

Checklist for exit planning

An exit strategy ultimately hinges on the existing business structure and the presence of a clear successor, whether that be an employee or a family member. Whether the goal is to sell the business or pass it on, it's crucial to follow an essential checklist by answering these questions to unlock the full value of the business:

1. Have effective processes and practices been put into place?

To ensure a business operates smoothly, it's vital to adopt effective practices and apply them consistently. Prospective buyers or successors should be able to take over and manage the business seamlessly, maintaining daily operations without disrupting client services. This is only possible if the business can function autonomously, regardless of the specific individuals involved, including in the case of a sole trader.

2. Have the practices been documented?

When buyers have a clear understanding of how a business operates, it becomes a much more appealing option. By documenting practices, processes, and insights about client needs, sellers provide confidence that the business is well-prepared for sale.

3. Is the business prepared for the future?

When buyers step in, they already have a lot on their plate, so they’ll appreciate seeing that the most up-to-date practices and systems are in place. They’ll also want to know that clients are receiving services that are both relevant and scalable, if needed, to ensure a seamless transition. Unfortunately, many businesses struggle with this aspect during the sale process. Often, operators, especially sole traders, cling to their old ways, which can hinder the full value of their expertise – such as strong client relationships and reliable advice - from being recognised.

4. Has value been maximised?

Business owners should evaluate their operations and pinpoint the strategies required for growth, profit maximisation, and enhancing market appeal to increase overall value. After identifying these strategies, it's essential to put them into action.

5. Are contingencies covered?

Many business sales and closures occur due to unforeseen circumstances. Issues like health problems, family disputes, and stress are significant contributors. Business owners often find themselves without the luxury of choosing when or how to sell their business, making it crucial to plan ahead for these external challenges. Regularly assessing the business's value, even if it's just an estimate, can provide a clearer picture of what a reasonable return might be if contingency planning becomes necessary.

6. Has a target buyer been determined?

Understanding your ideal buyer can significantly influence your strategy and preparations, ensuring your business stands out when the time to sell arrives. It's beneficial to have a clear picture of your target audience, even if it’s not a specific company, as this will help you take the right steps to enhance your appeal. Selling to a new sole trader will differ greatly from selling to a local rival or an out-of-state business seeking to grow. Each potential buyer will be interested in what makes your business a prime candidate, including the goodwill and value of your client base, as well as unique insights that they wouldn’t have if they were starting from scratch. Additionally, they will want to understand your vision for the future and how you plan to ensure the business continues to thrive.

7. Have the relevant stakeholders been given clear information?

It's essential for succession planning that stakeholders involved are interested in the specifics. By grasping the exit timeline, the possible value or expenses associated with exiting, and the expectations, they can more effectively contribute to the process.

Conducting regular reviews is key

It's important to understand that exit planning isn't a universal solution; it’s tailored to each business and its owner, focusing on what works best for them. The most crucial step for owners preparing for an exit is to make themselves unnecessary, allowing the business to run smoothly without their direct involvement. Additionally, as the business evolves, the exit plan should also be flexible and updated regularly, so it's wise for businesses to review their strategy at least once a year.