You have just started up your recruitment business and probably the last thought on your mind is the exit plan. Well while this may seem an inappropriate time to think about that step, beware, it may be that should the business fail; the business exit is forced upon the owner in an unplanned and painful manner.
Creating value in a business is a desirable objective; however, extracting the value for the benefit of the business owner can be undertaken in different ways. Plan your desired option.
This month we review some of the ways that owners exit their business.
Forced Unplanned Exit
It would seem sensible to at least give thought to a fall back plan from the start of the life of a business. If the business encounters trading difficulties a fall back plan may provide the necessary focus to avoid a substantial financial failure.
An unplanned forced exit from a business is the least desirable outcome, and one that with professional advice sought at an early stage may be avoided. The value of a business in such circumstances will be very little if anything at all, and the ambition and enthusiasm of the business owner; so much in evidence at the commencement of the business will not be rewarded.
How does the business owner avoid an unplanned business exit?
In addition to ensuring a positive cash flow in the business all decisions from the first day of trading should be carefully considered and taken only if they contribute to achieving the business and personal goals of the owner. The key is developing and working to a coherent business plan that drives the business forward. If the wrong decisions are taken early when setting up the business infrastructure then it can create protracted and costly amendment later.
Businesses don't plan to fail and to achieve success it is essential to remain focused on your targets throughout all decision making processes.
Do not deviate from your plans unless for very good reasons and an unplanned business exit can be avoided.
Living Beyond the Means
Occasionally a business owner may seek to enjoy the good life' before the business results can support such a lifestyle. Expensive cars and holidays, overspending on company leisure activities and personal lifestyle choices may bleed the business of much needed cash at a time when re-investment in the business may be desirable.
Just keeping up appearances' may be enjoyable for a short time but in the long term it usually comes at a significant cost in terms of money.
The business owner may decide to pay themselves a large salary, a bonus or declare dividends on a regular basis. If controlled this approach may not result in the business being traded at a loss. However, the planned regular depletion of cash from the business may restrict future growth through a lack of re-investment and the tax implications of such large rewards may not be attractive.
In these instances the owner may choose for the business to remain small but to provide a very comfortable lifestyle. That is fine and simply a choice but the owner cannot expect a large settlement when the business is eventually sold.
Liquidate the Company
The alternative that is always available is to simply close the doors. Sell the assets, if any, collect the receivable balances and pay the creditors. If there is anything left that is what you and other shareholders walk away with. However, the goodwill value attached to the business will be lost.
Sell the Business
A willing sale of the business in line with your plans and timeframe is a controlled exit that can reward the business owner for the successful operation they have built up; a business that can generate healthy profits and looks just as likely to do so again next year. Your rewards as an owner are based on buyer's view of their chances of the repeating the success you have achieved.
The business or the shares in the company may be sold to a willing buyer for a price and structure that both parties feel comfortable with.
Selling your company is again an area to seek advice from external professional advisors who understand the timeframes involved, current market values, and negotiation and transaction pitfalls.
An Initial Public Offering (IPO) may be another route to exit the business, but perhaps in exceptional circumstances. Shares may be offered by the owner in the company to financial institutions and/or members of the public. This may raise capital for the business or provide the opportunity for the owner to extract cash value from the business.
In many cases, as the founder of the business it is difficult to see an IPO as an immediate exit but more a fundamental shift in the whole way the business operates. Owners departing too quickly and selling large swathes of shares after an IPO don't usually inspire market confidence. So this option may well create greater value over time but it may be some years before it can be fully realised.
Article Written By Richard Hayward of HHMC