Michelle Rodger: Keep searching for an exit even when the going is good

Published on Saturday 3 April 2010 14:49

I WONDER how many entrepreneurs launch a business with the end in mind, looking to the future with a well-defined exit strategy? Not many, I suspect.

Running your business with one eye on what's happening to your cash flow forecast and the other eye firmly on that enormous villa in the south of France with the luxury yacht berthed at the bottom of your garden is clearly to be recommended.

How else can you plan for your future if you don't know what to do with your business to achieve it?

It has been suggested that now might be a good time for entrepreneurs to consider an exit strategy, in light of the recent Budget. Apparently the doubling of entrepreneurs' relief and confirmation there will be no increase in the main rate of capital gains tax is great news for business owners, who should make a move now in case the goal posts move after the election.

The doubling of the threshold is designed to enable entrepreneurs to benefit more from their effort and investment, with the first 2 million return taxed at 10 per cent, and subject to CGT at 18 per cent above 2m. Sounds like a great opportunity.

But is "quick" better than planned? It seems not: knee-jerk reactions can be completely wrong. Instead, business owners should take the time to develop a longer-term earnings-enhancing strategy before slapping a "For Sale" sign over the front door.

According to MacRoberts partner Alan Kelly, tax should never be the primary consideration when planning to sell your business, but a series of smart, strategic acquisitions could improve the bottom line and maximise the opportunity to realise much more value from any sale. He also suggests ensuring that all systems, policies and procedures are in place and well documented prior to any due diligence being carried out by a potential buyer.

We all know that most SMEs could do with being better organised, but this distinct lack of preparation could actually damage the sale. "If you take three days to provide employees' service contracts or a copy of your lease because your systems are a shambles, then that could be considered a potential liability and lead to price-chipping or even scupper the deal entirely," says Kelly.

While tax implications might be low right now thanks to Chancellor Alistair Darling, it should be remembered that so are prices, and it might make more sense to consider a longer-term strategy with a view to selling in a few years' time when economic recovery is much stronger.

So says Gareth Magee at accountants Scott-Moncrieff, who asks his clients to answer six "golden questions" before selling up. It's a simple framework to help judge when the time is appropriate to sell a business.

Firstly, is the time right? Is the tax regime generally benevolent or does it appear likely to become less so? Is the company right? – the company has to be attractive to potential buyers. Is the business owner right? – is he or she committed to handing over the business, and are any other stakeholders ready to sell?

Is the buyer right? – the seller must be convinced that the buyer will be good for the stewardship of the company, and that he/she will look after the people left in the business. Is the price right? – well, clearly no further explanation required here. And finally, is the team right? – a business owner needs to have the right people around at the time of selling, otherwise it could all end in chaos.

Magee, corporate finance partner at Scott-Moncrieff, says it is essential to be able to tick all six boxes but, possibly most crucially, the business owner needs to have a strong management team that is capable of driving the business forward when the new bosses arrive.

"The most successful business owners plan ahead and work themselves out of a job," says Magee.

His opinion is shared by serial entrepreneur Alan McCafferty. Now a business consultant who sits on the board of the Entrepreneurial Exchange, McCafferty understands the importance of building a great management team. If the buyer suspects the business revolves around the owner and will fall apart when he leaves, he's not going to want to take that risk.

"It's good business practice for an entrepreneur to work themselves into redundancy," says McCafferty. "Business owners should always surround themselves with excellent key people, skilled individuals who work well together as a team and who can ensure the business will survive and thrive without the owner."

It also means that there's a good opportunity for a management buyout, which is often less risky and can allow the business owner to continue in a non-executive role and ease their route into retirement.

McCafferty also warns entrepreneurs not to do an all-share deal; that's not an exit, that's only a potential exit for the future. By all means consider shares or loan notes, but look to maximise the cash payout.

So if you haven't already pictured yourself enjoying the fruits of your labour, it would make sense to start working on that exit strategy now. That way, the next time the Budget swings in your favour it won't be such a knee-jerk reaction and you will be positioned to take advantage of it.