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Exit Planning - What is exit planning?

18 September 2006 Mike Shorten

When you start a business your primary objective is to run a profitable business. Ultimately you will want to leave the business, and this is the time when the real benefits of all your years of effort should bear the most fruit.

Exit planning is the plan you develop to ensure that when you leave your business you do so under your terms whilst maximising your return.

Exit planning is very important and should be done sooner rather than later.

Why should you plan for your exit?
Small to medium businesses are more often than not difficult to sell. Seller expectations are often not met especially in terms of price. You will want to receive full value for all your hard work through the years when you sell your business. You will want to minimise any tax payments to the Receiver. You will also want to keep the stress of exiting your business to a minimum. All of these can be best done through planning for your exit.

Effective exit planning has the added advantage of making your business easier to run. This is because the steps you need to take to make your business more saleable are also those that improve your business and make it easier to manage.

Ask yourself "What would happen to my business should I be forced to take leave for six weeks starting tomorrow?" If you dont like the answer, you need to start planning for your exit and executing you plans now!

When should you plan?
Now immediately! Ideally your business plan for starting your business should include a section on exit planning. This is not only to help set goals but it can also have impacts on the legal structuring of the company. It is easier to put appropriate structures in place at business initiation that just prior to sale.

An exit plan can be simple to start with, it should be reviewed annually, and it should get more and more detailed as it gets closer to the time of your exit.
What should your plan cover?

Each business and its owner are unique. There is no generic exit strategy. However, the following points should be found in the majority of plans.

Time and value: The exit plan should have a target time to exit and a target value generally based on your personal requirements.

Maximising value: You need to identify the value drivers of your business and promote them to their full extent. At the same time you need to identify all those areas that detract from the value of the business and start addressing these.

Tax structuring: Tax planning is an essential part of the exit plan. Optimal ownership structures need to be in place to minimise tax payments to the Receiver. The actual mechanism of sale can also have tax impacts. These need to be identified and mitigated where possible.

Mechanics of sale: Your exit plan should look at the various options to exiting your business and determine the most appropriate options available to you. There are only so many ways to exit a business each of which has their own impacts and considerations. These include:

* Selling the business as a going concern to a strategic buyer such as a supplier or competitor.
* Selling the business as a going concern to a financial buyer who typically would be new to the industry.
* Sell or pass the business onto a family member.
* Sell to staff.
* List the business on the stock exchange.
* Close the business and liquidate the assets.

Personal protection: You need to start removing any personal guarantees or sureties. You dont want to have any of these coming back to haunt you once you have sold the business.

Contingencies: You need to plan for unforeseen contingencies. Death or disability can have major impacts on the saleability of your business.

Action plans: To put it all together you need a timeline to sale. The time line would specify when each of the identified areas needs to be addressed and who should do it.

Who can help you?
You can define your exit strategy yourself but you are likely to need professional help especially around tax and legal issues. Experience has shown that it is advisable to make use of external advisors. An exit strategist can look at your business from an independent perspective and advice you on what needs to happen to achieve maximum value whilst minimising complications.

Selling a business is something the average business owner will only do one or twice in their life. It can be an intimidating exercise, even when using professionals.

What should you do now?
As was stated at the outset, if you dont have an exit strategy then now is the time to start.

Start with a broader plan and then investigate the details. Do this with a qualified advisor who has been through the process and who can view your businesses objectively. Make sure that the plan is workable and documented thoroughly.

Mike Shorten specialises as an exit strategist. He has extensive experience as a business consultant to small to medium businesses, as a buyer of businesses, and as a business broker. He specialises in exit planning and in particular in advising businesses in preparing for sale so as to maximise the value received.

Mike Shorten
[email protected]
www.exitplan.co.za
082 771 4158
011 706 6138


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